The Treasury is considering extending whistleblower protection to the City in a bid to prevent market manipulation.

It is hoped the power would encourage people to come forward with evidence of fraudulent activity without fear of prosecution.

Shares in bank HBOS tumbled last week when false rumours were spread about the bank.

The Financial Services Authority (FSA) has so far failed to find those responsible and has been accused of a historic lack of power to find rogue traders.

The FSA’s previous attempts to lobby the Treasury for whistleblower immunity, bringing it inline with the Home Office and Serious Fraud Office, have been rejected by the Treasury.

But chancellor Alistair Darling said he was now prepared to consider the plan during a “period of unprecedented uncertainty”.

In an interview with the Guardian he said: “I can’t allow us to get into a situation where people quite deliberately manipulate markets for personal gain and with the potential to destabilise the financial system.

“We have a duty to ensure we have clean and efficient markets. We will come down hard on people manipulating the system.”

A similar system operates in the US and the chancellor has consulted with US treasury secretary Henry Paulson on the feasibility of extending it to the UK.