Large institutional invest­ors have been returning to the market for Irish bank shares in recent weeks after a long absence as the threat of nationalisation that hung over the sector for months begins to recede, analysts say.

Stockbrokers are reporting firm interest and some buying, especially in Bank of Ireland, this month from the big investment and pension funds that had given up on the sector over the last year.

"The level of interest has increased dramatically," said Davy banking analyst Emer Lang. "Since Nama was announced there has been far more interest from institutional investors who simply didn't want to talk [about Irish banks] anymore."

The shift in sentiment is a welcome development for finance minister Brian Lenihan, who has been resisting calls from economists and the Labour party to solve the banking crisis by taking over the institutions covered by the guarantee scheme.

According to industry sources, nationalisation had become especially unpalatable to the government due to the unusually high proportion of retail investors on the banks' share registers after the institutions exited. Bank of Ireland reported last week that individual investors had built up a 52% share in the bank, up from a historical average of around 20%.

"The government must be conscious that if they are to go the nationalisation route, they'd be burying half the shareholders," said Lang.

Bank of Ireland shares rose dramatically last week after the bank announced a plan to add up to €700m to its capital reserves by buying back €3bn of its undated debt at a discount to face value.