US shares and bond prices staged a recovery late yesterday after an earlier fall had driven Irish financial shares sharply lower in heavy trading.

While the ISEQ Overall Index was down 6.06 points, the financial index fell by 2.6 per cent although it may be encouraged by the late rally on Wall Street when it opens this morning.

The US stock market is currently unable to find any coherent direction, with a 3 per cent fall on Friday being followed by a 2 per cent recovery on Monday and then by another sharp fall just after European share markets closed yesterday.

In a day which one trader on Wall Street described as being like watching "bungee jumping" the Dow Jones index was down almost 100 points at one stage, before recovering to end with small gains, at 5583.89 up 2.89.

The late recovery appeared to have been motivated by some renewed optimism over US budget negotiations fuelled by comments from US President Bill Clinton and by figures for sales in US stores which were relatively weak.

Most of the weakness in Dublin took place when the Dow was trading within a range of 30 to 50 points below the overnight level.

The erratic trend of the market appears to reflect clearly divergent views among investors on the direction the market is likely to take.

Dealers in Dublin reported heavy selling of the financial shares, which tend to rise and fall with bond prices. With US treasury bonds down sharply in early trading and the Irish gilt market weakening, share prices fell sharply with Bank of Ireland down 14p on 410p and AIB 10p weaker on 315p.

Overall, £160 million was wiped off the value of the financial shares and the sector is 11 per cent off its all time high of late January.

Bond markets have fallen back to the levels reached after the mini crisis on Friday evening.

The US long bond fell by a point to yield 6.72 per cent in a move which kicked off a further weakening in European markets, but later recovered to close yielding less than 6.70 per cent, after some data suggesting US retail sales may not be too buoyant. The T bond had dropped to yield 6.71 per cent after the release of employment figures on Friday suggested economic growth was very buoyant.

The five year Irish 8 per cent bond closed at 96.10 to yield 7.67 per cent from 7.23 per cent on Monday. The 10 year due 2006 closed at 98.98 to yield 7.98 per cent, from 7.93 per cent at the previous close.

Dealers said the long end weakened significantly in most markets. German bund futures were weak, even in advance of the US opening, while the British long gilt was off nearly a full point.

Irish short term interest rates managed to hold on. The key one month was trading around 5 1/8 per cent as analysts continued to expect a Bundesbank cut in its key discount rate.

However, traders said many players were moving out of the longer end of the market. "That money is going straight into the cash market as it goes on one month deposit," one trader said.

Markets are anxiously awaiting a raft of statistics from the US later this week. Retail sales, which are due to be announced today, are expected to come in at 0.6 per cent growth.

"Anything higher than that will confirm a real recovery and we'll see further slippage as nervousness really sets in," one analyst said.

However, if the figures imply that Friday's employment numbers may have been one off, there will be a recovery and a refocusing on short term interest rates in Europe, he added.

The Federal Reserve's Beige Book will also be examined closely to reveal its thinking on the economy and possible interest rate moves.

In London, the FTSE 100 index showed a 33 point gain at the opening of trading. However, tensions surrounding the war like posturing of China regarding Taiwan and a renewed slide when Wall Street reopened sent equities plunging back into negative territory, closing down 35 points on 3639.5.