THE value of the state's 18% stake in AIB has plunged by €175m since May as the bank's share price hit a 12-month low last week.

The bank's shares fell 14% last week to reach a one-year low of 54 cent, cutting the value of taxpayers' stake in the bank, which is held by the National Pension Reserve Fund, to just €105m. AIB has an overall value of just under €580m.

AIB was forced to hand over 18% of its shares to the government as it was unable to pay a cash dividend of €280m on the €3.5bn that the state injected into the bank last year.

The bank was blocked from making dividend payments by the European Commission.

The bank, which needs to raise €7.4bn by the end of December to meet new capital requirements set by the Financial Regulator, has now seen 83% wiped off its value in the past year as investors fear it will be unable to find the money from private sources.

"The government currently owns 18% of AIB, although this will most likely increase, potentially over 50% by the time AIB is done with capital raising," Ivan Zubo, an investment strategist at French bank BNP Paribas, said on Friday.

AIB has raised €2.5bn of the €7.4bn by selling its 70% stake in Polish lender Bank Zachodni WBK.

Bloxham Stockbroker's head of research, Kevin McConnell, said last week that the bank is nearing the sale of an asset for €1.2bn. This is believed to be its 24% stake in American Bank M&T. Its British and Northern Irish businesses are also on the block as are a number of smaller assets.

The bank said last month that it hoped to have agreements in place on asset sales by the end of September. The Financial Regulator hasn't said whether it would allow AIB longer to complete the disposals.

According to McConnell, the bank may tap investors for €3.5bn. It is likely to do so in the same way Bank of Ireland raised €2.9bn of capital, through a placing with institutional investors, offering more shares to current investors and the government.

But with the share price in freefall it is likely that the government will convert more of the €3.5bn of preference shares it holds in AIB into ordinary shares. That would almost certainly see the government raise its stake above 50% and possible as high as 75%.