ASIC has extended the ban on covered short selling of financial securities until 31 May 2009.
The ban was due to expire today.
ASIC based its decision on continued volatility in global financial markets and potential damage from predatory short-selling practices.
"ASIC has decided to continue with its cautious approach and keep the ban in place," the regulator said yesterday.
"Its judgement continues to be that any possible loss of market efficiency or price discovery as the result of the continuation of the ban is justified given the current market circumstances."
The decision is controversial as many trading houses, hedge funds and international regulators have argued the measure is causing too much disturbance in the market. Its effectiveness has also been doubted.
"We are not surprised, but disappointed," said IFSA deputy chief executive John O'Shaughnessy. IFSA had been lobbying for a lifting of the ban.
"There's no evidence for the idea that the ban on short selling is actually reducing volatility in the market," he said.
Many of Australia's largest banks and financial institutions are thought to have welcomed the measure as they hope it will limit falls in their share prices.
The share price of Macquarie Group spiked briefly when the market opened but fell back late yesterday. The bank did not want to comment on the extension of the ban.
A total short-selling ban was first put in place on 21 September 2008. Since then the ban on non-financial securities has been lifted.
