The UK government is set to give its financial watchdog new powers to grant whistleblowers immunity from prosecution in return for evidence on market abuse, Chancellor Alistair Darling told the Guardian newspaper yesterday

The Financial Services Authority has long been lobbying for plea-bargaining powers similar to a US-style whistleblower system, which it says would help track down the often elusive "smoking gun" behind market abuse cases and boost the number of convictions.

The debate has been given new impetus by current market turbulence and a raid on shares in mortgage bank HBOS last week, which prompted both the FSA and the Bank of England to make rare public statements reassuring the market they would clamp down on market abuse.

"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," Mr Darling told the Guardian.

"People are getting away with it and the time has come for us to start looking at (plea-bargaining) again," he said. "If a handful of people are up to no good we have to make sure the authorities have the tools to do the job."

The paper said the proposals would give FSA officials "specified prosecutor status", allowing them to grant immunity from prosecution in return for evidence against people suspected of market manipulation.