Irish banks endured another bad day on the Irish Stock Exchange yesterday, with a negative trading update from British bank Northern Rock prompting falls in the share prices of financial stocks.

Anglo Irish Bank, which is exposed to the British market through its loan book, was the hardest hit, with 4 per cent wiped off the value of the company. It fell 62 cent to close at €14.88 yesterday, with more than seven million shares traded.

Bank of Ireland, which has a lending operation in the UK, also fared badly, falling by 3.2 per cent to €14.80m, down 49 cent. AIB dropped 40 cent, a fall of 1.9 per cent, while Irish Life & Permanent escaped the mostly lightly, losing 1.77 per cent.

Europe-wide concerns have surfaced that rising interest rates will play havoc with balance sheets and slice into profits, while the trading update from mortgage lender Northern Rock, hit British banks such as Lloyds TSB and Royal Bank of Scotland.

Northern Rock, which competes in the deposit account market in the Republic, put the blame squarely on higher interest rates for driving up its funding costs and forcing a cut in 2007 profit forecasts. Shares in the bank tumbled 11 per cent.

German and French banks also suffered, while Spanish and Italian banks mostly held their ground.

Cheap money has driven a lending boom across Europe and has fuelled a long run of record banking profits. But as the European Central Bank and the Bank of England have ramped up interest rates, there is a growing sense of foreboding that a benign credit cycle is about to turn.

European banks have benefited from a wave of consolidation, which has supported stock prices.

However, the volume of deals has dried up because there is little merger and acquisition activity in the summer. ( Additional reporting: Reuters)