WASHINGTON, Sept 19: The US government, trying to boost investor confidence in the face of a market crisis, took the unprecedented step on Friday of temporarily banning a practice of betting against financial stocks.

The move by the Securities and Exchange Commission will temporarily ban what is called short selling of 799 financial stocks. The rule took effect immediately on Friday.

The move, announced on the agency’s website, is a reflection of regulators’ concern about the widening scope of the financial crisis as entreaties come from all quarters to stem a swarm of short selling.

The SEC also eased restrictions on the ability of companies to buy back their own shares, also through Oct. 2, a move aimed at helping restore liquidity to the distressed and volatile market.

In the announcement, the commission said it was acting in concert with the UK Financial Services Authority in taking emergency action to “prohibit short selling in financial companies” to protect the integrity of the securities market and boost investor confidence.

“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” SEC chairman Christopher Cox said in a statement.

“The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets.”

The move, he said, would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the Federal Reserve, the Treasury and Congress.

A recent wave of the market manoeuvres -- where traders seek to profit by selling shares they don’t own in the anticipation the prices in the company will drop -- has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big companies.

Cox, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting on Thursday night with members of Congress.

The SEC said its action calls a time-out to aggressive short selling in financial stocks and said it would consider measures to address short-selling in other publicly traded companies.

Short selling, in a normal market, contributes to efficiency while adding liquidity to the markets. But now, the SEC said, it appears that “unbridled” short selling was contributing to the sudden price declines in the securities of financial institutions.

On Wednesday, Sens. Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for such a temporary ban, saying the watchdog agency “has the power to take a temporary but important step to help restore a measure of stability to our financial markets.’’

The New York state on Thursday launched a probe into illegal short selling practices that may have hurt finance firms, including Lehman Brothers and Morgan Stanley, state attorney general Andrew Cuomo said.

Cuomo said that short selling itself is legal but that “what is illegal is if you are spreading false information, rumours, and you join a conspiracy to purposely drive down the price of a stock, and you are profiting from the decline,” he said in an interview with CNN.—Agencies