London's future as a leading financial centre is under threat from the Financial Services Authority's plans to force banks based in the capital to improve liquidity.

The City regulator has drawn up proposals which it says are designed to avoid the kind of liquidity crises that overwhelmed Northern Rock and several of the Icelandic banks when they faced a run on their deposits.

The FSA is keen to act quickly while other international regulators are dithering over new rules.

But trade bodies in the City, such as the London Investment Banking Association, the British Bankers' Association and the International Swaps and Derivatives Association, fear the FSA is stepping out of line with its counterparts.

In a joint submission to the regulator, they say: "We are concerned that this proposed regime could trigger regulatory retaliation in which each jurisdiction seeks to ring-fence more and more liquidity within its own borders in more and more prescriptive ways.

"An immediate effect could be a reduced competitiveness of the UK market place."