The FSA said it would re-introduce a ban on short-selling if need be
The ban on short-selling of financial shares in the UK is to be lifted, according to Britain's City watchdog, the Financial Services Authority (FSA).
The FSA said the ban would expire as planned on 16 January, despite calls from MPs to keep it in place.
But rules requiring the disclosure of "short" trading positions will be kept for an extra six months, the FSA said.
Short-selling is when investors borrow shares which they sell, hoping to buy them back later at a lower price.
The regulator said it would reinstate the ban if it saw fit.
A temporary ban on short-selling was introduced for 34 financial stocks in September last year due to the financial turmoil in the markets.
Announcing the ban's end, Sally Dewar of the FSA, said: "We believe that these proposals are the right measures for maintaining orderly markets.
"Continuing the disclosure obligations as we propose will reduce the potential for abusive behaviour and disorderly markets," she said.
The financial watchdog has already scrapped rules which required automatic daily disclosure of short trading positions by investors, regardless of whether there had been a change in the position.
The regulator had been urged to maintain the ban on short-selling, given the continuing problems in the stock market and as bank shares continue to slide.
Last week, Liberal Democrat Treasury spokesman Vince Cable joined some MPs in asking for an extension to the ban, or at least for it to be maintained for banking stocks.
When the ban was introduced, FSA chief executive Hector Sants said that while short-selling was a legitimate investment technique in normal market conditions, the "current extreme circumstances" had given rise to "disorderly markets".
Short-selling was also blamed for steep falls in HBOS shares and trading in the stock was subject to an FSA investigation last year.
Yet the regulator found no evidence that rumours were spread about the bank in a bid to manipulate its share price.
The industry body for the hedge fund industry, Aima, welcomed the proposals to lift the ban.
Chief executive Andrew Baker said: "Although we naturally support efforts by policymakers and regulators to achieve stability in markets, particularly during emergency conditions, we do not feel that this ban achieved its stated aims."