The deal, expected to be completed towards the end of the year or early in 2007, would be the first big strategic move by PTSB since Denis Casey took over as chief executive last year.

It is understood that PTSB will work through a joint venture, building on an existing relationship in Britain between Merrill Lynch and PTSB's sister company, Capital Home Loans. The American bank has been a major specialist lender in Britain since 2004 when it acquired Mortgages plc.

It concentrates on lending to people turned down by mainstream mortgage providers because of prior credit problems or their earnings are irregular. Because of the risks involved, they are charged a margin of 2% or more over mainstream mortgages rates.

Sub-prime mortgage lending is still in its infancy in Ireland with estimates of the potential market ranging anywhere from 2.5bn to 4bn. The first lender to enter the market was a joint venture between GE Money and IFG Group. But it has been largely overtaken by Start Mortgages, owned by UK sub-prime lender, Kensington, and a management team that defected from GE Money. Start wrote more than 250m worth of business in the first half of this year, up from 44m in the same period of 2005.

PTSB's decision to seek a partner is believed to reflect its desire to protect its existing brand in the mainstream market. It will also want to tap Merrill Lynch's know-how in a business that requires a very different set of underwriting criteria.

According to one market insider: "By its nature, subprime lending is not a tick-box business. You have to make a lot of qualitative judgements about how bad the credit risk is and how long it's going to take to come good."