European stock markets were poised to extend last year's red-hot rally into the new millennium as bourses across the Continent assured investors of a Y2K-free kick-off to today's trading.

"The markets will open up this week with business as usual and long live the rally," said Mr David Brown, chief European economist at Bear Stearns.

Continental European bourses and Wall Street reopen today, followed by London and Japan's financial markets tomorrow.

Trade on the Irish Stock Exchange also resumes tomorrow and a spokesman said that further Y2K-related testing yesterday had identified no problems.

"Y2K appears to have proven to be a dead duck and now European stock markets can think ahead and look forward to 2000 and unimpeded growth," Mr Brown said.

The US Federal Reserve also said last night that the millennium rollover was proceeding without a hitch.

But Fed officials cautioned they would not let down their guard until businesses and financial markets resumed full operations.

Analysts expect European shares to chalk up fresh record highs as investor worries about the millennium bug ease and bourses benefit from the January effect, the traditional start of year boost from tax and portfolio related transactions.

Even the shock resignation of Russian president Boris Yeltsin is unlikely to prove a short-term negative and should even give a long-term boost to market sentiment, analysts said.

By mid-January, however, analysts and traders said they expected a possible pull-back as investors start worrying again about lofty stock valuations - especially in rally leaders technology, telecoms and media - and widely expected first-half rate hikes from the Federal Reserve and European Central Bank.

"We may see a good market in the first two weeks or so, but I could imagine that we could see some profit-taking in the middle of January," said Mr Udo Becker, a trader at Merck Finck & Co in Munich.

In thin pre-holiday dealings, European shares closed at record highs on Thursday.

But Dublin bucked the trend, with the ISEQ closing at 5017.54, only marginally ahead of its 1999 opening level.

On the wider front, the mood today will also be helped by last Friday's gains on Wall Street where the Dow, the Nasdaq and S&P 500 all ended the year at record highs.

Europe's stock exchanges, clearing systems and investment banks were completing their Y2K tests yesterday with all the signs so far pointing to a glitch-free kick-off to new millennium trading.

Some officials were privately moaning about spending fortunes on lengthy software checks as the likelihood of financial market chaos appeared remote amid successful testing.

"So far, there have been no date-related problems and we do have a schedule of checking that we will continue to run until Tuesday morning," a spokesman for the London Stock Exchange, Europe's biggest bourse, said.

The Deutsche Boerse in Frankfurt, which operates the Xetra stock and Eurex derivative trading systems, said yesterday that more than 75 per cent of its members had been reconnected to the exchange following the millennium changeover and no problems had been encountered.

All members were expected to be reconnected by late afternoon, the Boerse spokesman added.

Exchanges in Paris, Brussels, Madrid, and Zurich also said final tests were going smoothly.

The European Central Bank said on Saturday that all of its systems, including the TARGET settlement system, were working as planned but that the real test would come today when markets reopen.

In Dublin, the Central Bank said it had successfully completed all planned testing of the operation of its systems without problems. It was continuing to monitor the financial institutions that it supervises and no problems had been reported to date.

The US Securities Industry Association said on Saturday that weekend tests had uncovered minor problems with dates and decimals, but that those issues had been quickly fixed.

Europe's two international clearing and settlement systems, Cedelbank and Euroclear, said testing was complete and bugfree.

Investment banks, which provide a big chunk of stock market trading volumes, were also testing systems yesterday.