Market observers have plenty to be puzzled about as of late. The federal government reverses itself and bails out AIG ( AIG). The credit markets suddenly dry up, and the Fed issues more liquidity. Then, the feds unleash a plan to bail out billions of dollars in troubled mortgages.

Amid this backdrop of financial mishaps, the market is having a tumultuous week, falling dramatically, and then recovering to close the week basically flat. Virtually everyone agrees that the events of the past 10 days are unparalleled, but to explain the reasons behind it is even more problematic.

Some market observers and participants are not ruling out financial terrorism, although how someone or some group would accomplish that is another puzzling matter.

Joe Besecker, president, chairman and CEO of Emerald Asset Management, believes the possibility of financial terrorism has to be considered. He says that he is regularly in communication with professional short-sellers, and they claimed they were not shorting financial stocks heavily enough to push them down as sharply as they went down in the first three days of the week.

"It doesn't make sense, the guys like Morgan Stanley ( MS)CEO John Mack and the people at Goldman Sachs ( GS) are saying, 'What the hell's going on here?,' " Besecker says. "We've sent all this money off shore. I want to know who's the real patriots to put these guys out of business?"

Besecker says the desks he is talking to are saying a lot of traders are saying a lot of the short trades on the financials were coming over electronic trading networks, which allow people to place bets anonymously. Who's to say a well-funded international or domestic terrorist isn't taking advantage of widespread market fear and exacerbating the situation?

Besecker also argues that the government ban on short-selling instituted Friday in financial stocks is so extreme that he cannot understand it unless there is a truly compelling reason, such as a threat to national security.

"This is like a wartime move," he says, likening it to when the government ordered all the airplanes out of the sky on 9/11. "Ninety-nine-point-nine percent of the planes in the sky were harmless, but they didn't know so they had to order them all down just to be sure."

While financial terrorism is an intriguing possibility, not all market observers are buying into the theory. Adam Sussman, director of research at the Tabb Group, a financial consulting firm with special expertise in issues related to electronic trading, dismisses the argument that short selling has been the major factor bringing down the market in recent days.

"It's even more probable that part of the decline in the financial sector is a deleveraging -- people just selling the stocks in order to return the cash that they borrowed," Sussman says. "If we were to say what percentage is, one: people closing cash positions; two: people closing margin positions; and three: people short-selling, I think short-selling is the smallest of those percentages."

As a practical matter, orchestrating a plan to bring down markets via short-selling would be extremely difficult, says Alex Tabb, a Tabb Group partner who focuses on issues of crisis and business continuity.

"Conspiracies of this type are easy to talk about and throw out there, but the truth of the matter is that to actually do them is very difficult, and the complexity involved -- there are market safeguards in place to identify this type of activity. People are selling short, there's no doubt about it, but not to a level that has raised any monumental concerns."

Richard Bove, analyst at Ladenburg Thalmann, does not dismiss the idea of terrorists bringing down the market.

"They certainly have the money in Arab lands to attack the U.S. stock markets; don't disagree with that. Whether they did it or not, I wouldn't have a clue," he says.

Besecker doesn't believe that much money is required, because lots of the shorting could be so-called naked shorting, where investors sell short shares and fail to actually borrow them, even though they are legally required to do so.

Thomas Lee, equity market strategist at JPMorgan Chase, says in a recent report that it is not clear how much naked short-selling is occurring, but there were 22.5 billion fail-to-deliver shares in June. That is up 100% from 2005. The number of incidents increased by 27% to 69,654 instances from 54,779 in the same time.

"The number of shares equates to 1.1 billion per day, of which some portion of these could be a result of 'naked' shorting,' " Lee writes.

John Heine, spokesman for the Securities and Exchange Commission, also didn't rule out the possibility of market manipulation but didn't offer any evidence the commission believed "financial terrorism" was occurring, either.

"I'm not sure what you mean by financial terrorism, but if it involves violating the securities laws, anyone who has any information should contact the commission," Heine says.