FSA moves to prevent panic selling as markets face further turmoil

War on Terrorism: Regulator to relax rules as airlines continue to suffer and bids hang in the balance

The Financial Services Authority is today expected to announced a further relaxation of the rules which have forced Britain's largest insurance companies to sell billions of pounds worth of shares.

The move should mean that insurance companies will not have to dump blue-chip shares to meet claims from the terrorist attacks on the US and tough regulatory tests on solvency.

The FSA is looking to lift the "resilience tests" which it offers as guidance to insurance companies' actuaries. It has already relaxed one guideline under which actuaries were asked to consider the implications of a 25 per cent fall in equity values combined with a 3 per cent rise in interest rates. It dropped the interest rate element of the guideline just before the attacks. It is now looking to temporarily drop the guidance on a 25 per cent fall in equities and use a lower figure instead. "It is fairly likely you will see some moves by the FSA early this week and quite possibly on Monday," a spokesman said. "It would help end the technical selling of equities."

The FSA also said it was monitoring the financial strength of several split-capital investment trusts. It is particularly concerned about so-called "funds of funds" where trusts invest in each other, often using heavy bank borrowings. "It is an area we are looking at quite closely," an FSA spokesman said.

The comments came as traders brace themselves for another turbulent week on the world stock markets. Most equity strategists believe the UK markets will come under renewed pressure.

Richard Jeffrey, chief economist of Charterhouse Economics, commented: "The markets are going to remain in a state of high anxiety until the political situation becomes clearer." Asked if the FTSE 100 could slump below the 4,000 barrier this week, after closing at 4,433 on Friday, he said: "I don't think you can rule it out but the truth is I'm really not sure."

John Hatherly, head of global analysis at Charterhouse Economics, was more upbeat. After Friday, which he said was a day when "people were selling at any price", he suggested there may be some rises in the next few days. "I wouldn't be surprised to see some 100 to 200 point bounces early this week," he said.

Equity strategists say cash-rich and lowly geared companies are more attractive than ever. Those with large cash piles include Associated British Foods and Cable & Wireless. Others such as the tobacco companies, Vodafone and Glaxo are seen as candidates with the firepower to take advantage of falling asset prices with cash takeovers.

Investment bankers are already preparing for an upturn in cash deals in the technology sector in the belief that values have now hit bottom. There is also scope for corporate action with an increase in disposals as large groups offload non-core divisions. "In the last recession the volume of disposals increased rapidly and the incidence of cash deals rose markedly," one banker at a European investment bank said.

Meanwhile, the venture capital market has been turned upside down by the events of 11 September. John Moulton, head of Alchemy Partners, said: "We've turned down deals at 20p in the pound that we were being offered a few weeks ago." He said venture capital buyers were finding it "impossible to value" companies in the current environment. Many deals that made sense before would now be looking stretched, he said.