The euro rose to its highest level since September yesterday as the markets reflected a growing expectation of euro entry following British transport secretary Mr Stephen Byers's suggestion that legislation enabling a referendum to go ahead could be brought forward in the autumn.

Financial markets now see a slightly better than even chance that Britain will join the euro by the end of 2004, the highest probability since 1997, according to analysts at HSBC bank.

In the past two days the euro has gained about a penny against sterling, passing through 63 pence yesterday afternoon as Mr Byers's remarks fuelled market perceptions that the government was preparing the ground for a referendum.

In a BBC interview on Wednesday, Mr Tony Blair, the Prime Minister, said he would be happy to be remembered for taking Britain into the euro.

A greater likelihood of euro entry weakens sterling because it is generally agreed the exchange rate for entry would have to be below its current level, perhaps at about 68 pence.

HSBC said interest and exchange rates implied a belief in the markets that there was a 52 per cent chance Britain would have joined the euro within the next two-and-a-half years.

Short-term and long-term interest rates in Britain have moved closer to their euro-zone counterparts. Further, the expected sterling/euro exchange rate in the futures market has moved closer to that likely entry rate and the expected fluctuations between the pound and the euro have also declined.

Mr Marc Austin, chief currency strategist at HSBC, said: "After the budget, the markets took a slightly negative view of the chance of euro entry but there has been a wake-up call this week."

However, many analysts are sceptical of the strength of the government's commitment to the euro.