Short selling is a legitimate form of trading that can prevent stocks from being overvalued, but often blamed when a company's shares fall. Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of making a profit when the price drops.

A trader works on the floor of the New York Stock Exchange, September 17, 2008. [Agencies]

Harry Strunk, partner at Treflie Capital Management fund said: "Anyone who stops lending the stocks may be engaging in market interference in my mind, and that is worrisome."

Cuomo said he would use a New York securities fraud law called the Martin Act, which gives the office both criminal and civil jurisdiction.

From Thursday, US securities regulators tightened rules on traders who profit from stock declines.

UK securities regulators imposed a ban from Thursday through January 16 on the short-selling of financial-sector stocks to help stabilize the market.

A "naked" short sale occurs when an investor sells stock that has not yet been borrowed. Broker-dealers will sometimes accidentally fail to deliver stock to investors who have arranged to borrow it. If this is done intentionally it is already illegal.