The Irish stock market surged by close on 5 per cent yesterday, recovering €2.3 billion in lost value as overseas markets rallied.

A strong performance from financial stocks in particular, as Bank of Ireland bounced back from the battering it took this week, helped the ISEQ index of Irish shares to close 178 points higher.

The bank's shares clawed back earlier losses to end 6.6 per cent higher on the day. They ended 5.5 per cent lower on the week, having been down as much as 15 per cent on Wednesday, as investors took the view that its merger with Abbey National had fallen by the wayside.

Other financial stocks also benefited from an uplift in the sector internationally as concerns over bad debt exposure receded. AIB finished 4.7 per cent higher, Anglo Irish Bank gained 4 per cent while Irish Life & Permanent was up 6.5 per cent. "Stocks were looking alarmingly cheap while markets across Europe went better as a follow-through from the US," one dealer said.

In the US, stocks ended the week higher for the first time in seven weeks as the Dow Jones index gained 4.10 per cent. Analyst optimism about the outlook for computer giant IBM and reassuring earnings from industrial conglomerate GE restored some hope to the battered market.

US retail sales and producer price data were also in line with forecasts, reassuring investors.

In London, the FTSE 100 advanced by 4.7 per cent to its best closing level since mid-September, buoyed by the prospect of a merger between broadcasters Granada and Carlton and a bounce in bank shares.

French and German shares also made sharp gains with the Paris market closing more than 5 per cent higher while shares in Frankfurt gained 7 per cent.