APPROVAL for the Italian lira to re enter the European exchange rate mechanism is expected to be given today at a meeting in Brussels of the European monetary committee.

Mr Romano Prodi, Italian prime minister, yesterday confirmed the imminent return of the lira. It was a question of "a few hours or days".

The lira's re entry to the ERM comes four years after it and sterling were forced out. The move will add considerably to the growing consensus in European capitals and financial markets that European monetary union will go ahead as planned in 1999 and that Italy could be in the first wave of countries joining.

The Italian Treasury yesterday said late yesterday: "The Italian government has requested the procedures be set in motion for the readmission of the lira to the ERM. The procedures will begin tomorrow in the monetary committee."

Italian government bond prices rose sharply on the news that Italy had requested the Brussels meeting. Trading in the lira was more subdued because of uncertainty over the rate at which the currency would be fixed within the ERM.

Analysts in London said the lira's re entry might be accompanied by interest rate cuts by the Bank of Italy, which would probably boost bond prices and remove speculative pressure on the lira.

The Italian Treasury's terse announcement emphasised that the formal re entry mechanism was only due to be initiated at today's meeting, and made no reference to it being concluded. However, officials pointed out privately that the procedures for Finland to enter the ERM last month were settled at a single session of the monetary committee.

The centre left government said six weeks ago it intended to have the lira inside the ERM by the end of November, once the 1997 budget had passed through the lower house The budget was approved last weekend by the chamber of deputies and informal negotiations were immediately set in motion.

All the detailed work on re entry is understood to have been completed and the move is only awaiting political approval.

Italian officials have been arguing that a determined attempt is being made to put public finances in order to comply with the Maastricht criteria.

On the London currency markets, the lira strengthened to 996 lira against the D Mark before falling to 1,000 lira. It closed at 999.2 lira unchanged from the previous day.

Demand for Italian bonds and the resulting plunge in yields followed increased optimism that monetary union would go ahead. Regardless of when Italy joins monetary union, Italian bonds maturing after it joins will be redeemed in the planned single currency, the euro.

This year the lira has gained 8 per cent, but remains far from its parity of September 1992 when, along with sterling, it was forced out of the ERM with a heavy devaluation.

In recent weeks the Bank of Italy has been intervening to ensure the currency hovers around 1,000 lira to the D Mark.