Eight or nine of Britain's leading banks and financial institutions are said to be at the centre of the probe, amid claims that insiders are profiting from privileged information about the Anglo-French Channel tunnel operation.
As well as dealing a further blow to Eurotunnel shares, the controversy looks set to further tarnish the reputation of the City, which is still reeling from scandals involving improper trading at Morgan Grenfell and Robert Fleming.
A spokesman for the SFO, James O'Donoghue, said yesterday: "The Serious Fraud Office has agreed to investigate, on behalf of the French authorities, allegations of market manipulation in Eurotunnel shares."
But he said Britain's top anti-fraud body would not launch its own investigation. "We do not have grounds to investigate market manipulation on a domestic level. You have to remember that the bulk of shareholders in Eurotunnel are French, and most dealings in Eurotunnel have taken place in Paris, rather than in London, so it's not surprising that the focus should be over there." The inquiry, which follows a visit to the UK by French fraud police last week, will be led by Chris Dickson, who heads overseas investigations for the SFO.
Sir Alastair Morton, the former British chairman of the group, and his French opposite number, Patrick Ponsolle, have complained vociferously and publicly about volatile movements in the share price, which they claim resulted from leaked information and rumours started by market operators. The company welcomed the inquiry.
The SFO denied that it was acting under political pressure in taking on the case, despite its admission that it did not have enough evidence to launch an investigation on its own. It emerged over the weekend that the London Stock Exchange has already looked into dealings in Eurotunnel shares through its surveillance department and has been unable to substantiate allegations of insider dealing in the London market.
Suggestions that the group's share price was being manipulated date back at least as far as its second rights issue, which raised pounds 850m in 1994. The Comite des Operations de Bourse, the French equivalent of the Stock Exchange council, began investigations just before that cash call, but appeared to get nowhere. However, in September the Swiss authorities were brought in and, according to a newspaper report yesterday, the French are pointing the finger at "suspicious operations" involving banks in Geneva and Zurich.
The SFO has wide powers to interview people and recover documentary evidence in the pursuit of an investigation, which does not have to relate to frauds committed within its jurisdiction.