Irish bond yields hovered below 6 per cent as the Government announced it would split Anglo Irish Bank into two separate entities.
The interest rate or yield on Government 10-year bonds fell back after the Government said Anglo would be divided into a funding bank and an asset recovery unit, which would be wound down over time.
At close, the yield on Irish bonds was 5.991 per cent, down from an earlier high of 6.047 per cent.
Earlier, credit-default swaps on Ireland rose 21 basis points to 402.5, surpassing a previous closing high of 396 in February 2009, according to data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
Shares in Irish banks were also hit this afternoon, with Bank of Ireland closing at 70 cent, down about 3 per cent, having been off almost 7 per cent earlier in the session. AIB closed at 75.5 cent, down less than one cent.
Irish Life and Permanent fell 3.66 per cent to close at €1.63.
Credit-default swaps on the nation's banks also soared, with contracts on Anglo Irish Bank climbing 58.5 basis points to 774.5, the highest level since March 2009. AIB jumped 29.5 basis points to 521.5 and Bank of Ireland increased 21 basis points to 409, CMA prices show.
A basis point on a credit-default swap contract protecting €10 million of debt from default for five years is equivalent to €1,000 a year.
Minister for Finance Brian Lenihan and Taoiseach Brian Cowen have insisted the cost of dealing with the problems in Irish banks are manageable because they are spreading the costs out over 15 years and the State has no immediate funding requirements.
But analysts said they need to be more specific.
"They will have to put clarity on the language and clarity on the numbers. This business of saying it's manageable is not going to wash with the markets," said Alan McQuaid, economist with Bloxham Stockbrokers in Dublin.
"The market is saying, 'You are trying to juggle too many balls, you're weighed down by Anglo and you are not going to be able to generate enough economic growth and implement fiscal austerity and meet budget targets by 2014, it's just impossible,' that's what the market is telling you."
A senior member of German chancellor Angela Merkel's party said today that Ireland, Portugal and Spain probably won't need support from the euro zone rescue fund.
The €440 billion European Financial Stability Facility, headed by former European Commission official Klaus Regling, was set up in May as the Greek debt crisis threatened to spill over to other euro states.
"I see - and Mr Regling stressed that as well in the past days - that the stabilisation fund is probably not going to be used," Leo Dautzenberg, parliamentary Finance Committee spokesman for Ms Merkel's Christian Democratic Union, said today in an interview.
In a speech in Riga, Ms Merkel said that debt-laden governments must stick to their deficit- cutting programs because Germany won't agree to have the euro fund turned into a permanent facility to provide aid.
"The crisis mechanisms now in place are temporary," she said in the Latvian capital. "Germany won't agree to an indefinite prolongation. Otherwise, people would say 'we've got such a nice rescue package in place that this can go on forever.'"
Additional reporting: Bloomberg, Reuters