The mock excercise, which involved the UK's Tripartite authorities and ran for six weeks between 13 October and 24 November, found that absence rates at financial firms could top 60% in some business units in the event of a pandemic.

Across the financial sector as a whole, the heaviest impact of a pandemic would be upon the provision of customer-facing retail financial services.

The report on the exercise says "bottlenecks" were caused in the distribution of cash. In addition, growing staff shortages forced the high street banks to close an increasing number of branches, which reduced the availability of services, including ATMs. Furthermore, banks would not be able to replace expired debit and credit cards, which could leave customers with no access to cash. The report called for the creation of a "co-ordinated strategy" to deal with these issues.

The City's wholesale financial markets would fare better in the event of a pandemic and would be able to operate. Due to the high level of automation, only very high levels of absenteeism would threaten the critical functions of wholesale firms, says the report.

But during the exercise firms responded to the growing shortages of front, middle and back office staff by reducing trading volumes.

"Proprietary activity was sharply cut back as firms concentrated their resources on fulfilling customer-driven business and maintaining strong liquidity positions," says the report. "Throughout the scenario virtually all trading was conducted on-site as firms were not comfortable that they would be able to maintain a sufficient level of compliance and control to allow trading from home on a prolonged basis."

The report says following the exercise many organisations are re-evaluating business continuity strategies in areas such as "human resources, third party dependencies, outsourced ancillary services, suppliers, operational priorities and communications".

The Tripartite authorties - Bank of England, HM Treasury and the FSA - say the universal feedback from firms that participated in the exercise was that it was important to keep the markets open, even if on reduced hours.

The authorities will be holding a series of workshops and seminars with participants in the first part of 2007 on improving procedures to make sure the financial system keeps operating in the event of a bird flu outbreak.

Last year both UK and US regulators urged financial institutions to devise contingency plans for dealing with a possible widespread outbreak of avian flu. Some banks in Europe, such as HSBC, have implemented plans to deal with a possible pandemic.

Read the report here: