Finance minister Brian Lenihan tried to convince Dan O'Connor, the AIB chairman, to take the chief executive position at the bank twice but was turned down, the Sunday Tribune has confirmed.

It is understood Lenihan informally proposed the idea as a way to break the impasse between AIB and the Department of Finance over the appointment of a replacement for chief executive Eugene Sheehy, who announced his resignation in late April but has stayed on in his post while the board seeks a successor.

Neither the bank nor the department would comment on the information. AIB said O'Connor was currently away and it refused to comment on recent discussions between the bank and the government, which involved O'Connor.

The AIB board has tried repeatedly to promote the head of capital markets, Colm Doherty, to the top job only to be blocked by Lenihan's veto.

The minister and his officials are known to favour the appointment of an external candidate, but AIB insists it has been unable to attract anyone of sufficient quality for the terms on offer.

Lenihan is believed to have made the proposal to O'Connor, previously chief executive of GE Consumer Finance Europe, as a temporary compromise until a better solution could be worked out.

Banking sources have blamed the €500,000 salary cap for bank executives, which was imposed by Lenihan in February, for ruling out outsider candidates, as high levels of compensation still prevail for bankers in other countries. Former Bank of America executive Liam McGee reportedly turned down the AIB job for the more lucrative equivalent post at US insurer Hartford Financial Services.

At this stage, both sides have painted themselves into a corner.

Sources close to the negotiations say the relationship between the bank and the department – which was never the friendliest – has become heated and adversarial in recent weeks as the bank has struggled to find anyone suitable to Lenihan's requirements.

However institutional investors, who pushed for Sheehy's ousting in the first place, are now getting anxious about the absence of leadership at the top of the country's biggest bank, especially as it enters a crucial period in the coming months with the expected transfer of €24bn in troubled property assets to Nama.