Encouraging Irish banks to merge, supposedly to strengthen their defences to deteriorating bad loans from commercial property, would make matters worse, not better, overseas analysts have warned regulators and government here.

London analysts, who this weekend sounded increasingly downbeat warnings on the exposure of the Irish banks to a deteriorating Irish economy, confidently predict that the authorities will promote mergers among banks here, such as Irish Nationwide, Anglo Irish Bank and Irish Life & Permanent.

But Alex Potter, bank analyst at Collins Stewart in London, said that the jury is still out in Britain on whether the merger of Lloyds Bank with HBOS will help either bank.

The comments come as industry sources suggest that the Irish government and regulator has considered "encouraging" the weakest banks here to merge with bigger rivals.

Tania Gold, banking analyst at Dresdner Kleinwort in London, also predicted that "some form" of consolidation will take place among Irish banks, as banks face the fallout of their billion euro loans to undeveloped land banks that continue to fall in value.

Another senior London banking analyst, speaking on the basis of anonymity, said: "I am not convinced that Anglo wants to buy Irish Nationwide. I think the government wants Anglo to buy Irish Nationwide."

Other London analysts said that Anglo Irish Bank buying all, or parts, of Irish Nationwide would likely weaken both lenders.

Irish Nationwide said last week that it is not for sale, while Anglo Irish Bank has offered no official statement on the speculation. Senior industry sources here have, however, confirmed that there is "substance" in the takeover story.

There is reportedly concern throughout the sector that perceived problems in any one institution could put pressure on all institutions and so bankers are keen to prevent any part of the financial system falling victim to failure.

London analysts, who did not wish to be named, said that the deepening recession would ultimately force major banks here to be bought out or to merge.

Predictions that contagion would remain confined to the US have proven to be inaccurate, with even mainstream European banks like Fortis now falling victim to the credit crisis, or as it is being called in the US, the 'credit quake'. Fortis was last week trying to restore investor confidence after its shares plunged 35%. In­vestors are concerned Fortis will have to sell assets at fire sale prices in order to desperately re-capitalise its balance sheet.

Fortis tumbled a record 20% to €5.20 in Brussels trading last Friday, while the cost of protecting Fortis bonds from default surged. The shares have fallen 71% this year.