The London Stock Exchange (LSE) is investigating the takeover rumours which drove Allied Irish Banks shares to record levels in recent weeks, although market sources are doubtful that it will be able to come up with anything substantive from its investigations.

AIB's head of investor relations, Mr Maurice Crowley, confirmed the investigation and said that it arose following fresh takeover rumours on Wednesday, the day AIB announced its financial results.

"There were further rumours on Wednesday and, as a result of those, the stock exchange contacted our London brokers, Warburg. We told Warburg and the stock exchange that we were fully aware of the rumours and that, if it suited the exchange, they could investigate the source of the rumours," Mr Crowley added.

Mr Crowley said that AIB had always refused to comment publicly on market rumours, but the bank had pointed out to investors that most analysts, and also the Dublin media, had rubbished the takeover rumours. The official line from AIB is that the best defence against a takeover is its performance and the strength of the share price. "It has been an unwelcome distraction," said Mr Crowley.

But few in the market have much confidence that the LSE will be able to pinpoint the source of the takeover rumours. "These were planted by people interested in making a quick killing when the shares rose. I'd be astonished if they haven't completely covered their tracks - the exchange is just going through the motions," said one London market source.

It is understood that senior AIB management has been irritated for weeks at the succession of rumours that drove the shares from €15.27 at the start of the year to a record high of €18.70 at the beginning of February. Various potential bidders were touted - including ABNAmro, ING, Lloyds TSB and Deutsche Bank - and these rumours were swallowed hook, line and sinker by many British investors. They were also swallowed by sections of the British financial press which became convinced that AIB was going to be taken out for £15 billion (€19 billion), and reported virtually on a daily basis that a bid was imminent.

But the takeover rumours were largely dismissed here, not necessarily because AIB is not an attractive takeover prospect, but because any buyer would have to absorb an enormous goodwill write-off of more than £11 billion, based on the suggested offer of £15 billion.

At its peak, AIB shares were trading at almost six times book value and 23 times the earnings announced this week. Those ratings were simply unrealistic and as the takeover rumours dissipated, AIB shares have drifted back to more realistic levels. The shares lost 55 cents yesterday to €15.15, and have now lost all of the extraordinary gains of the past six weeks.