Politicians have effectively blocked any prospect of an imminent merger between Bank of Ireland and AIB.

Yesterday the two banks announced they were abandoning a proposed joint venture through which they would share their information technology services blaming the likely lengthy deliberations into competition issues and the costs involved. The joint venture was seen as a first step towards a possible merger of the two organisations.

The Department of Enterprise, Trade and Employment, yesterday confirmed that the Tánaiste, Ms Harney, had asked the European Commission to refer the case back to the Irish Competition Authority so that its impact could be fully assessed.

The Tánaiste said it would have been "more appropriately" examined by the Irish authorities rather than by the EU. "It was felt that the joint venture warranted a detailed examination because of possible impacts on competition in the retail banking market where the parties enjoy high market shares," said a spokesman.

The Irish Times has learned that all 15 Irish members of the European Parliament also made representations to the Commission urging it to block the proposal on the basis that it would be detrimental to the level of competition amongst Irish banks.

In a statement yesterday, the Commission expressed its surprise at the banks' announcement to abandon the merger at this early stage of the process. "This was a standard merger investigation as was the referral request and the Commission normally refers to national competition authorities such mergers whose impact on competition is mainly national," it said.

Bank of Ireland and AIB both stated that they had withdrawn their application to the European Commission after it indicated a further investigation would be undertaken. "Both banks concluded that such an extended process would create great uncertainty and would be unduly costly. It could also have an adverse impact on customer services and would be de-stabilising for staff," according to a joint statement.

The banks said they were disappointed the venture would now not go ahead as it would have reduced processing costs and improved efficiency and customer service.

The decision to abandon the venture was welcomed by the Consumers Association of Ireland and the Irish Bank Officials Association, which had both raised strong opposition to the venture to the EU commissioner responsible for competition, Mr Mario Monti. These groups also expressed their concerns to the Government.

The Republic's two biggest banks appeared to have been surprised at the strength of political opposition to their plans. Bank of Ireland and AIB claim they had not lobbied the Government ahead of submitting the proposal to the EU although no political opposition was aired when it was announced in June.

The joint venture was to be established on a 50/50 basis with some 700 staff expected to transfer from AIB and Bank of Ireland's technology divisions to the new company. The banks stated they would employ an independent management team to run the company and that neither would have access to information concerning each other's customers.

The banks had claimed the joint venture was not the first step towards a full merger of their operations which has been advocated by Bank of Ireland chief executive, Mr Michael Soden, in March.

At that time the Minister for Finance, Mr McCreevy, indicated that he would not have any opposition to serious merger talks between the two institutions. The Tánaiste had said any such merger would be "anti-competitive and represents a bad deal for consumers".