The City watchdog yesterday launched an inquiry into the feverish speculation and scaremongering that has destabilised London's stock market to such an extent that the Bank of England was forced to intervene to quash rumours about one of the UK's biggest banks.

The Financial Services Authority's announcement of an investigation into potential market manipulation by the spread of "false rumours" was later echoed by the Securities and Exchange Commission in the US, which also warned that it was looking into trading ahead of last Friday's collapse of Bear Stearns.