The Tánaiste has said she would oppose any proposed merger of AIB and Bank of Ireland. Her position - outlined yesterday - puts her at odds with her colleague the Minister for Finance, Mr McCreevy, who has signalled that he would not offer any opposition to serious merger talks between the institutions.

A link-up between the two banks was mooted by Bank of Ireland's new chief executive Mr Michael Soden earlier this month.

He made his comments as AIB struggles to contain the fallout from the $691.2 million (€789.6 million) fraud uncovered at its US subsidiary.

Although AIB's share price has held up well, there has been considerable speculation that it is now a takeover target. Mr Soden has pitched his proposal as an alternative to the takeover of AIB by a foreign bank, of which Royal Bank of Scotland is seen as the leading contender.

A spokesman for the Tánaiste said yesterday that she would oppose "any potential merger between the two main banks because it would be anti-competitive and represent a bad deal for the consumers". The merger would result in significant job losses and branch closures; two issues that would quickly spill over into the political arena. New competition legislation that is due to be enacted before the end of the current Government's term in office will transfer responsibility for vetting mergers to the Competition Authority.