March 6 (Bloomberg) -- Japan’s Financial Services Agency may extend restrictions on short selling of shares as stocks in Tokyo hover near their lowest level in 27 years, said an official at the regulator.

The extension of the temporary ban, implemented in October and due to expire this month, is being considered, said the official, who declined to give his name, citing government policy. The Nikkei newspaper earlier reported that the regulator had already decided to extend the ban.

The restrictions include a ban on so-called naked short- selling as well as requiring investors with short-sale positions of more than 0.25 percent of the outstanding shares of a stock to report their position to brokerage firms.

Regulators from Washington to London last year cracked down on short selling as part of global efforts to counter the worst market losses since the Great Depression. In the U.K., a Financial Services Authority prohibition on shorting 34 financial companies expired in January. The Securities Exchange Commission eliminated a similar measure Oct. 9 after exchange data showed the prohibition fueled volatility and made it more costly to trade.

“Short-selling with properly borrowed and available shares is the nature of the equity strategy game and should not be restricted or banned for any purpose,” said Winston Barnes, senior sales trader at WJB Capital Group Inc. in San Francisco. “As long as the shares are available, borrowed short-sellers have the same chance of profiting or not.”

Uptick Rule

Short sellers borrow shares and sell them, betting the price will fall and they’ll be able to buy them later, return them to the lender and pocket the difference in price. In naked short selling, traders never borrow the shares. The practice raises concern markets will be flooded with sell orders, driving down prices.

During a previous slump in the stock market in 2002, Japan’s regulator introduced a so-called uptick rule to discourage short selling. The rule allows investors to complete sales only if a stock’s price rises in the previous trade.

The MSCI World Index, which tracks shares in 23 developed nations, tumbled a record 42 percent last year and has lost 24 percent in 2009 as credit-related losses at financial firms neared $1.2 trillion.

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net

Last Updated: March 5, 2009 21:18 EST