Citigroup could face a fine or a warning over its controversial trading activities in the euro zone government bond market after the UK's Financial Services Authority (FSA) yesterday launched an investigation into possible regulatory breaches.

The FSA, London's chief markets regulator, said its enforcement division had launched a formal inquiry into Citigroup's "unusual trading activity" on August 2nd, which stunned other banks and forced the operator of the electronic trading platform to impose liquidity restrictions.

Citigroup shook the euro zone government bond market first by selling €11 billion of securities in less than two minutes, and then buying back €4 billion at a lower price soon after.

This forced EuroMTS, platform operator, to limit the amount of bonds a bank could sell within two minutes. Launching its first formal inquiry into government bond trading, the regulator said yesterday: "The FSA's key aims include maintaining efficient, orderly and clean financial markets.

"In the view of the FSA, achievement of that aim requires large players in financial markets to have regard to the likely consequences of their trading strategies. "

Citigroup's unprecedented trading tactics, which caused significant losses to some of its rivals, have divided dealers in euro zone government debt.

Some have accused the US bank of market manipulation and called for sanctions.

Many initially withdrew price quotes from EuroMTS in protest at Citigroup's moves in the government bond market.