The billionaire John Paulson was revealed yesterday as one of the hedge fund bosses who has been short-selling UK bank shares - placing a near £1bn bet that their share prices would fall dramatically.

His New York-based Paulson & Co was last year's most successful hedge fund after it bet against the sub-prime mortgages that later turned toxic in the credit crunch. Paulson & Co has placed bets on four high street banks, including HBOS, which was forced to agree a rescue takeover by Lloyds TSB last week after a precipitous collapse in its shares.

Emergency rules rushed in by the Financial Services Authority to ban short selling in bank shares after the woes of HBOS yesterday unmasked Paulson & Co as one of the funds betting on shares falling.

Short sellers bet that share prices will fall by selling shares they do not own in the hope of buying them back more cheaply - hence making a profit.

After last week's tumultuous stock market movements, the FSA ordered speculators to close down all short positions in bank shares within 24 hours or have their names made public.

The FSA's surprise clampdown fuelled London's record-breaking stock market rise on Friday. But the three-month ban failed to arrest the decline in bank shares yesterday, with HBOS the biggest faller in the FTSE 100, losing 14% of its value.

Paulson & Co admitted to four short positions:

· 0.87% of Royal Bank of Scotland worth £294m

· 1.76% of Lloyds TSB worth £260m

· 0.95% of HBOS worth £93m

· 1.18% of Barclays worth £258m

The hedge fund was one of a handful which braved the new FSA regime and retained their short positions past Friday's deadline - leading to yesterday's disclosures of their bets to the stock market.

Among the other dozen or so disclosures, Barclays Global Investors - owned by Barclays Bank - admitted taking a short position in St James's Place, a fund management group which is 59% owned by HBOS. Odey Asset management - run by Crispin Odey, who married into one of the families that founded Barclays - also admitted it was short in banking group Investec. The first fund to show its hand was Forteulus, based in London, which was short in London Scottish Bank.

The disclosures of the short positions came amid further volatile trading on the market; bank shares were particularly hard hit by anxieties that the US authorities's $700bn plan to bail banks out of their toxic mortgage assets would be blocked by Congress.

Bank shares were also knocked by figures from the British Bankers' Association showing the lowest level of mortgage approvals since records began in 1997 - 21,086 home loans were approved in August. The lenders blamed Alistair Darling for adding to the woes by causing uncertainty about whether stamp duty on homes was to be abolished.

These pressures weighed particularly on the share price of HBOS - as did concerns that its takeover could fall apart.

The value of the deal alters with the share price of Lloyds TSB and last night valued each HBOS share at 218p. In normal circumstances, HBOS shares would be near that level. But last night they closed at 188p.

The unusually wide gap caused confusion in the City and led to suggestions market traders think the takeover has a lot of hurdles to cross and could yet fail.

Leigh Goodwin, banks analyst at the stockbroker Fox Pitt Kelton, said: "It's an unusual movement and it could be over concerns that there will be some block on the deal."

Bradford & Bingley was also sharply lower, falling another 12% amid continued speculation that it would need to find a buyer to provide a long-term solution to its business model. The hedge fund Steadfast admitted it was shorting the lender.

Amid speculation that the FSA has been dusting down contingency plans in the event of further sharp falls in its share price, two ratings agencies downgraded their view on the bank.

B&B reiterated that its capital position was the strongest of the banks. After the stock market closed, it revealed it had taken action to stem losses caused by mortgages it bought from a financial services company owned by General Motors.

Standard & Poor's credit analyst, Nick Hill, said: "The downgrade reflects our view that constraints on B&B have increased materially in recent weeks, although liquidity is currently strong. At the heart of these problems is the likelihood that asset quality in B&B's key products of self-certified and buy-to-let mortgages continues to weaken rapidly."