WORLD financial markets suffered a "frantic Friday" yesterday as comments by Mr Alan Greenspan, the Federal Reserve chairman, about "irrational exuberance" in asset markets unsettled traders and investors.

The implied threat behind the comments was that the Fed might at some point, have to raise rates to cool such sentiments and to head off inflationary pressures.

In Dublin some £350 million was wiped off the value of the Irish stock market as share prices fell sharply in response to the comments by Mr Greenspan.

At the close, however, there were some signs of renewed interest in Irish shares after Wall Street recovered from an early 140 point fall to trade down 65 points as the Irish market closed. Bond prices also took a tumble in response to the possible rise in American interest rates signalled by the Fed chairman and gilt yields rose sharply on the Dublin market for the second successive day.

While Mr Greenspan's remarks took the Irish market as much by surprise as other international stock markets, dealers and fund managers in Dublin took some heart that the knee-jerk reaction in London which saw the FTSE fall 169 points at one stage was not maintained. The FTSE eventually closed down 88 points on 3963.0 a creditable performance given the initial response of the London stock and futures markets.

Dealers said that while there was some substantial selling of the two main banking stocks and building materials group CRH, the pattern of the market was one of plenty sellers with few buyers. Many fund managers also seem to have decided to sit it out and wait until it emerges how Wall Street has responded to the Greenspan remarks - once the initial selling rush in New York fizzled out.

Many Irish fund managers have already closed their books after an exceptionally good funds performance over the year. Many of these - however, will probably reopen their portfolios next week and try and regain the 2 to 3 per cent losses the incurred yesterday. "There will probably be a lot more action next week," commented one dealer.

Asian markets were the first to take fright, with the Nikkei 225 average in Tokyo falling 667.2 points, or 3.2 per cent to 20,276.7, its biggest one-day decline since April 1995. Hong Kong, which because of its link to the US dollar is closely tied to US interest rates, also suffered, with the Hang Seng index dropping 2 per cent.

Europe followed suit. At their worst, the German and French stock markets were down 4.7 per cent and 4.9 per cent respectively while Amsterdam dropped 6.2 per cent. In London, the FTSE 100 index was 168.5 points, or 4.2 per cent, lower at its worst.

The sell-off carried over into the US where, just after Wall Street opened, the Dow Jones Industrial Average shed more than 145 points.

But US payroll data eased fears of inflationary pressures and by the close the Dow was down 55.16 points at 6,381.94.

Mr Greenspan made his remarks bin a speech on Thursday evening on developments in US monetary policy. He suggested the central bank was paying close attention to the recent surge in US equity markets. Assessing movements in asset prices, he said, had to be an "integral part" of monetary policy.

"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?" he said.

The Fed has not changed short term interest rates since it lowered them at the start of the year, as inflation has remained low and wage pressures slight.

It was the Labour Department's employment report for November, which showed a jump in unemployment, that eased investors' fears a little.

Over the last three months, payroll gains have averaged 113,000 per month, less than half the pace earlier in the year. The figures were in line with other recent evidence that suggested growth has slowed to a more sustainable rate than was achieved in the first half of 1996.

The Dow's revival allowed European markets to rebound. Frankfurt finished 2.1 per cent lower, Paris lost 2.3 per cent and Amsterdam 1.9 per cent. In London, the Footsie dosed with a loss of 88.2 points at 3.963.