Shares In Irish Life and Irish Permanent are expected to rise strongly when trading resumes in Dublin today after the two groups confirmed they were at an early stage in merger talks.

The Irish market was closed for the bank holiday yesterday but shares in Irish Life soared by more than 10 per cent and Irish Permanent stock gained nearly 9 per cent on the London market after the two companies confirmed they were in talks which could lead to the formation of the third largest financial institution in the State.

In a statement issued yesterday, Irish Life and Irish Permanent said that, following initial discussions, further meetings would be held to determine whether there were any practical impediments to a merger.

They cautioned that there was no certainty that a merger could, or would, be implemented but went on to add: "In any such merger, it is envisaged that the transaction would be concluded on terms broadly in line with the recent relative market capitalisations of Irish Permanent and Irish Life."

Irish Life, which is valued at roughly £1.6 billion by the stock market, is double the size of Irish Permanent, which has a value of around £800 million. An announcement on whether the deal will go ahead is expected within weeks. However, if the two firms decide to proceed with the merger, it is likely to take until next spring to conclude a deal and secure the necessary regulatory approval.

In addition to approval from the Central Bank and the Minister for Finance, the Competition Authority is likely to be asked to examine and approve any merger.

The two companies employ around 3,000 people in Ireland but it is understood that job losses are not thought likely at this stage as the two operations are complementary rather than overlapping in many respects. Both companies, along with other firms in the financial services sector, are also facing problems recruiting skilled staff. Analysts said a deal between the two would make sense for both companies. "It makes sense for Irish Life because they need a distribution network and it makes sense for Irish Permanent because they need to diversify away from their core mortgage business," said one British banking analyst.

Irish Life shares closed at 529.5p sterling in London yesterday, a rise of 50p on the day, while Irish Permanent shares firmed 70p to 882.5p, a move that is certain to please the company's 140,000 shareholders, many of them small investors who got shares when the former building society floated in 1994.

Meanwhile, Irish Permanent's largest shareholder, the former British building society, Abbey National, only learned of the talks through the media over the weekend, a spokeswoman said. The company, which holds an 8.7 per cent stake in Irish Permanent, is watching to see what happens.

However, the spokeswoman said that when Abbey National bought its original 9.9 per cent stake in November 1994, it said it had no plans to acquire Irish Permanent at the end of the protection period.

"Nothing has changed since then," she said, adding that Abbey National viewed the Irish Permanent stake as an opportunity to take a strategic holding in a successful company with a large share of the Irish mortgage market.