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A piecemeal ban on short-selling of financial stocks in Europe sparked a rush of alternative proposals from countries and regulators on Friday and investors said the row undermined a rally in bank shares.

France, Italy, Spain and Belgium imposed bans, which varied according to country, while Britain, the Netherlands and Austria said they saw no need for action. Germany said it would instead push for a Europe-wide one on so-called naked short-selling.

The European Commission said a European framework would be more attractive to deal with the issue, and the chairman of the European Securities and Markets Authority called on European policy makers to adopt a plan for European-wide rules on short selling "as quickly as possible."

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Short-selling is the process through which an investor borrows shares and sells them on the expectation their price will fall and they can be bought back at a lower price.

In a naked short sale, the investor has not borrowed the share, but still bets on a drop in the share price.

Market players said the ban did not tackle the root causes of investors' concerns -- joined-up, long-term fiscal policy in the euro zone - and pointed out that nervous mutual funds were currently behind the sell-off.

Lothar Mentel, chief investment officer at Octopus Investments, said the lack of co-ordinated action from national regulators on short-selling restrictions threatened to undo the temporary respite in the markets.

"If at the core of this whole rout is disappointment with certain irresponsible behaviours of policymakers - note the game of chicken in the U.S. - they really need to get their act together and prove they aren't all on holiday," Mr. Mentel said.

A crackdown on speculative short-selling is unlikely to arrest moves from institutional investors who have decided they have little stomach for big holdings in banks and indebted governments who might call on them again for emergency capital.

"Data from various regulators of late have shown there is no short-selling activity out of the norm," said Davide Burani, financial analyst at Italian fund manager Horatius.

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"Investors are selling in Italy from fear. Italian banks are holding around €200-billion of Italian bonds."

European markets have swung wildly this week on rumours about the health and funding needs of indebted euro zone governments, and more recently on some of its major banks, which have sent shares tumbling.

On Friday morning the STOXX Europe 600 banking index yo-yoed, then crept steadily higher. By 1116 GMT it showed a 2.3 per cent gain, helping the broader market to advance 1.9 per cent.

French banks, at the centre of much of the market's attention and included in the ban on short-selling, were up: Société Générale SA rose 1.6 per cent, BNP Paribas SA added 1.2 per cent and Crédit Agricole SA gained 0.4 per cent.

The banking index has fallen 36 per cent from a peak in February and is down some 17 per cent in August alone.

Alessandro Frigerio, fund manager at Milan's RMJ Sgr said the ban could work if, combined with proposals from next Tuesday's meeting of French President Nicholas Sarkozy and German Chancellor Angela Merkel, it were to "give the idea that there could be a rescue for the euro zone and a rebound in the market"

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The European Securities and Markets Authority (ESMA) said on Thursday that short-selling combined with rumour-mongering created a strategy that was "clearly abusive."

In an interview with Reuters TV on Friday, ESMA Chairman Steven Maijoor added the curbs would be in place for "a while" but that they would not be permanent.

"There are no concrete plans at this stage for other countries, but we cannot rule out that that might change in the coming days and weeks and months," Mr. Maijoor said.

France banned short selling on 11 financial stocks for 15 days, Spain said it would protect 16 stocks for 15 days, Belgium banned short selling of four financial stocks for an indefinite period and Italy said its ban covered 29 companies in the banking and insurance sector.

Banks on the list included France's BNP Paribas and Société Générale, and Spain's Santander and BBVA .

French Finance Minister Francois Baroin welcomed the ban and said it highlighted the government's commitment to ensuring financial stability, avoiding market abuses and fighting against all forms of speculation.

This week's market turmoil focused on speculation about French banks, which are heavily exposed to European countries at the centre of the region's debt crisis, France's No. 2 lender, has especially been in the eye of the storm.

But French 10-year bond yields dipped below three percent on Friday for the first time since November showing demand for the country's debt remained intact despite banking sector concerns.

Reassuring data from the European Central Bank's overnight loan facility helped: the ECB said it totalled 227 million euros, much lower than the €4-billion borrowed the previous night, easing fears that banks were facing liquidity issues.

However, Danish Economics and Business Minister Brian Mikkelsen said several small Danish banks are facing a liquidity squeeze and the government was working on measures to make it safe for foreign investors to lend to them.

France and Italy said they would take action against investors who combined rumour-mongering and short-selling to manipulate banking shares. The French Banking Federation said French banks were considering legal action, while Italy's Consob said it would fine those who disregarded the short-selling ban.

Germany said only a wide-reaching ban on naked short-selling would do.

"We are advocating a wide-reaching ban on naked short-selling of stocks, sovereign bonds, and credit default swaps," Finance Ministry spokesman Martin Kotthaus said. "Only this way can destructive speculation be countered convincingly."

The European assault mirrors one by the U.S. Securities and Exchange Commission on Sept. 19, 2008, four days after Lehman Brothers collapsed, to temporarily ban short selling in 799 banks and other financial institutions.

Britain imposed a similar prohibition at that time.

The U.S. move was of questionable value, according to several academic studies. While share borrowing fell during the three-week ban, financial stocks continued to plummet.

"In 2008 we already saw that such a measure doesn't work..its a temporary patching up measure for a problem that needs still be resolved," said IG Markets strategist Soledad Pellon in Madrid.

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