Bank of Ireland shares failed to build on their overnight recovery in the Irish market yesterday. Disillusionment among institutional investors at the role of senior management in the Alliance & Leicester debacle was cited as one of the factors behind the renewed weakness.

It also emerged that the bank was taken by surprise by the Alliance & Leicester announcement on Wednesday that it had withdrawn from the merger talks.

It is understood an earlier deal between the two sides to explain in an agreed form any breakdown in negotiations was abandoned as Alliance & Leicester moved to get its side of the story out first. A Bank of Ireland negotiating team had been in London on Wednesday continuing the discussions. When they arrived in Dublin that afternoon they were told the deal had been called off.

The bank's shares rose by €1 to €17.50 (£13.78) in late trading on Wednesday after the announcement but could not manage any further gains and fell back as low as €17.10 (£13.47) yesterday.

They subsequently regained some ground in afternoon trading to close down 17 cents on the day on €17.33 (£13.65).

Market sources said that while the damage to Bank of Ireland management was one factor behind the poor performance, there were also other issues in play, particularly disinterest among Irish institutions in taking on additional Irish shares in the run-up to the Telecom Eireann flotation.

At the close, however, Bank of Ireland shares were reasonably well-bid and talk in the market of a possible share buy-back by the bank will probably prevent the stock weakening significantly. But it will need the approval of the bank's annual general meeting next month. Alliance & Leicester shares jumped 38 pence to £9.12 sterling on the London market as investors took the view that the collapse of the merger had increased the prospect of a bid for the British bank.

Market sources said that unless Bank of Ireland can persuade investors that it has a clear strategy to develop its business, there will be an expectation that it should use some of its surplus capital for a buy-back. Irish banks have no tradition of acquiring their own shares but some market sources believe Bank of Ireland might contemplate such a move to assuage the anger of institutional shareholders, who had questioned the logic of the Alliance & Leicester merger from the very beginning.

Bank of Ireland's chief executive, Mr Maurice Keane, has said the bank is exploring "other options" for future expansion but there are few in the market who believe that the bank, having devoted massive resources to the Alliance & Leicester merger, will be able to come up with an alternative corporate move in the short term.

On the other hand, there is little expectation that Bank of Ireland itself will actually become a takeover target, given the £5 billion goodwill write-off that would be involved. But market sources have not ruled out a merger. "The problem with the Alliance & Leicester proposal was that it was a merger with the wrong bank and on the wrong terms," said one fund manager.

Meanwhile, there are growing recriminations over how Bank of Ireland got the market reaction to the merger proposal so badly wrong.

There is also a clear sense of bitterness at the top level in the Irish operation at what it feels was the bad faith shown by Alliance & Leicester when the merger was first leaked to the media three weeks ago.

Bank of Ireland management is in little doubt that the leak was deliberately orchestrated by Alliance & Leicester and its various advisers to boost the British bank's positions in the merger negotiations and, in particular, to ensure that Alliance & Leicester chief executive Mr Peter White got the top job in the merged organisation.

Questions will also be asked about the role of Bank of Ireland's advisers, including its own IBI Corporate Finance subsidiary and its British adviser, investment bank Warburg Dillon Read. "When something like this goes so badly wrong, somebody has to take the flak. And if it's not the management, then it will be the advisers," commented one market source.