THE Easter break must be as welcome for Britain's banks as the ringside bell for a boxer taking a beating. After going several more rounds with an unforgiving stock market last week, the opportunity to take a breather and feel the benefits of a Bank of England rub-down will lift their hopes of staging a recovery.

The Bank's £10.9bn credit freshener should help restore order to the market after the chaos of the past few days in which HBOS's shares plummeted by up to 20% at one point before regaining all their losses by the close on Thursday. Other bank shares took a pounding as the sector felt the full force of a raging bear.

But as the chief executives of the five big banks left their meeting with Mervyn King, the governor, that night, it was understood they had asked for almost three times as much and their concern was that the Bank of England was not going far enough to head off further turmoil. A growing view was that the Bank should follow the US Federal Reserve by making more funds available to avoid complete meltdown.

There was some comfort last week in the quick reactions of both the Bank of England and the Financial Services Authority, the City regulator, to what was seen to be a malicious attack on HBOS shares. Both offered support and condemned the actions of short sellers – who sell borrowed stock to buy back at a lower price – and their actions appeared to have helped restore calm.

But with stories emerging that a London-based hedge fund had set up a dirty tricks unit to manipulate share prices, the spectre of market abuse hangs heavily over the City as the FSA launches its investigation into the actions of alleged rogue traders. In the meantime, the banks remain on alert for more raids by unscrupulous traders making a killing from a nervous stock market.

Against such a backdrop, former Bank of Scotland governor Sir Peter Burt said in a radio interview that it was important for the Bank of England to instigate its historic role as lender of last resort and that it should follow the example of the Fed. "He (King] should go the extra mile. I agree with what the Fed has done," said Burt. "It needs to be sorted out now. It is like a leaking roof. You have to throw a tarpaulin over it to stop the rain coming in."

King's caution has been prompted by concerns over 'moral hazard' – the danger of bailing out any bank that gets into trouble. Such willingness, he fears, would reward reckless behaviour. It is partly behind the Monetary Policy Committee's reluctance to follow the Fed and slash interest rates, which some believe was the root cause of the credit crunch. Lowering interest rates could merely encourage another spending binge.

But Burt said: "I am less concerned about moral hazard. The penalty for making a mistake is losing your job."

What Burt and other bankers fear is that bankers will not get the money they require to oil the wheels of the economy. Without the necessary funding, firms will not be able to extend overdrafts or invest. Burt said the crisis, for now, is confined to the financial sector "and that is where it should stay", but he fears that the crisis could spread. "When fear stalks the land then people panic and mob psychology is a very frightening thing."

Shares in Edinburgh-based HBOS hit the floor half an hour after the stock market opened on Wednesday morning. Within three minutes they plunged 17% and the bank's chief executive, Andy Hornby, knew he had to act quickly, ditching his normally reticent approach to the media to issue a statement. He knew it was against normal practice to respond to rumours but in an interview with Scotland on Sunday (see page 7) he said: "This is different. We are talking about the stability of the UK banking system."

But even with the City uniting to condemn the short seller, or sellers, and turn HBOS's fall into Thursday's third-best FTSE performer, there were those who felt this one move masks a greater malaise in the banking sector. One analyst said: "The HBOS share price has picked up a little bit but it is still pretty much near its all-time low since the merger (of Halifax and Bank of Scotland].

"There is still an awful lot of news to come out of the sector and it is very difficult when a share price has halved over the last year to blame some rogue trader. They will find him readily enough, if indeed there was someone, because the window in which the price fell was only 10 minutes so anyone that traded at that level will be easily identified."

The search for the rogue trader has now galvanised the City and media into a desperate manhunt fuelled by an urgent desire to clean up the market or face losing reputation and further volatility.

The FSA launched an investigation into "trading in UK financial shares in recent days" without mentioning HBOS. Intriguingly, a spokesman said: "There were others apart from HBOS. We were very careful not to name any firms. We were concerned about shorting for all firms."

It was a rare move by the regulator though it did issue a note to compliance officers last September, in the early weeks of the credit crunch, warning that it would take action if it witnessed abnormal trading.

The FSA will trawl through trades and has systems to detect anything unusual, and it will urge firms to report anything suspicious, but the spokesman admitted: "It is no use pretending it is an easy thing to do."

Some rate its chances of success as extremely low, given the difficulties of proving abuse and even tracing calls and e-mails, which can be made privately.

It was reported on Friday that a London hedge fund, which has not been named, employed private detectives to hack into the e-mails and telephone records of executives at two companies in which it had an interest.

It is also said to have set up front companies to enable traders to pose as independent researchers and journalists and approach company executives to get information on their firms.

The negative information they gathered was then circulated to leading investment banks in the hope that the rumours would spark share price falls.

This short-selling practice is not illegal, though borrowing stock to sell and then attempting to hit the share price with false rumours is illegal, and is punishable with fines or even imprisonment.

Some believe that in this current climate, rumours will be leapt upon and the panic sweeping the market will result in wild swings in prices. James Clunie, investment director in the UK equities team at Scottish Widows Investment Partnership, said: "We have seen the failure of Northern Rock, a hedge fund and Bear Stearns (the US investment bank], and if you wanted to start a rumour now is a good time to start it."

Clunie said the raid on HBOS looked malicious though data available on share trading in the run up to Wednesday's attack showed nothing to cause alarm. UK stock lending figures reveal the amount of stock on loan and HBOS was showing only an amber light, whereas others were flashing red. But the data beyond Monday is not available until next week.

"The data can be difficult to interpret because people borrow shares for different reasons – for dividends, and so on," he said. There was also a lot of intra-day shorting which would not necessarily be picked up.

Clunie said proving malice or market abuse would be difficult. "It could be a combination of long-only investors selling because they were fearful, together with some who were short or underweight. It could have been malicious or non-malicious. I don't see any evidence of deliberate market manipulation. But certainly there were rumours in the market."

Those rumours were in plentiful supply. First, that HBOS was seeking emergency funding from the Bank of England. Both HBOS and the Bank of England issued a denial. Second, the Bank of England had cancelled staff bank holiday leave in order to deal with the crisis. Denied. Third, Mervyn King had cancelled a trip to Asia. Wrong, but he did postpone a trip to West Bromwich. Fourth, Lloyds TSB was also in trouble. Denied. Fifth, HBOS was cutting off credit to small businesses. Not true.

While HBOS was emphatic in its denial of problems, there is an acknowledgement in the sector that all banks will suffer further exposure to the credit crisis because of the deteriorating conditions. "This is serious stuff. We are in difficult and dangerous times," said one banking analyst.

But UK banks are still reporting lower losses than those in the US and mainland Europe and their balance sheets remain fundamentally strong. In the main most UK banks are well capitalised and some, such as Royal Bank of Scotland, have enormous assets that could be offloaded to raise funds.

There is bound to be some nervousness when the City and the banks return to work on Tuesday, but attention will focus on the next round of trading statements from the banks next month. It is hoped that by then they are showing signs of being ready to re-enter the ring.