Taiwan's benchmark stock index is down 27% this year, hurt by fears over global inflation and slowing economic growth as well as soaring U.S. interest rates. It closed down 0.9% on Monday.
Taking lawmakers' questions in parliament, Thomas Huang, head of the Financial Supervisory Commission, said a move on Friday to raise the cost of shorting stocks was aimed at stabilising the market and winning investor confidence.
"In the past, measures to increase the cost of short selling have been somewhat effective. At present Taiwan stocks are still falling, so we need to watch this for a while," he said.
But the government will not take "extreme steps" unless it is really necessary, Huang added.
U.S. interest rate increases were likely to continue, he said, further driving down the market as it sucks foreign capital out of Taiwan.
"The main reason for this wave is the U.S. rate rises which have enormous suction power," Huang said, referring to the market falls.
One of the reasons for foreign capital outflows is the widening of the interest rate spread between Taiwan and the United States, he added.
But foreign investors will eventually pay attention to the "fundamentals" of Taiwanese stocks, Huang said.
(Reporting by Emily Chan; writing by Ben Blanchard; editing by Jason Neely)