EUROPEAN Union finance ministers reached a compromise late yesterday to allow the Italian lira re enter the exchange rate mechanism of the European Monetary System.

It was agreed that Italy would reenter the ERM at a central exchange rate of 990 lira to the German mark. The Italian currency's central rate against the Irish pound will be lira 2385.9

EU finance ministers made it clear that they would not allow Rome to return to the EU's Exchange Rate Mechanism (ERM) with a relatively weak lira.

Italy trimmed earlier demands that it re enter the ERM at a central rate of 1,010 lira to the German mark. It lowered its sights after it failed to get agreement on entry terms at a nine hour meeting on Saturday.

"The Italians are proposing to come down to 1,000 (lira to the German mark)," one diplomat said during yesterday's negotiations referring to the central rate at which the lira would enter the EU's currency grid.

Other EU countries feared entry at that exchange rate would give Italian exporters too much of a competitive advantage and argued for a rate of 950 to 980 lira to the mark. There were concerns too about Italy's plans for the singled currency in 1999.

Italy considers membership of the system as crucial for the credibility of its effort to be in the first wave of countries adopting the euro in 1999. Two years membership of the ERM is one of the qualifying conditions for EMU.

Germany is adamant that only strong economies should be given a chance to qualify for the planned single currency. Sources said Germany was especially angry with Italy for seeking to reenter the ERM at a weak rate. One source said Bundesbank president Mr Hans Tietmeyer wanted a rate of 970 lira to the mark.

France, which has lost market share to Italian industries since the lira left the ERM in 1992 wanted a rate of about 950 lira.

Luxembourg's Finance Minister, Mr Jean Claude Juncker said he was not surprised at the failure to agree on Saturday because the issue had far reaching politic consequences.

After Saturday's failure, finance ministers were under in tense pressure to reach agreement before Asian markets reopened today.

There were fears that failure to agree would lead to a huge sell off of the lira, which would put paid to Italy's chances of getting back into the ERM.