THE Italian lira has gained ground as markets reacted positively to the currency's return to the ERM and to hopes of early interest rate cuts.

However the tough negotiations on its re entry to the currency grid were seen as offering a glimpse of the hard political negotiations ahead on who will be members of EMU.

In Dublin the pound fell to 2518 lire from 2526 on Friday as the Italian currency rose.

However for the Italian government it might be a case of two steps forward and one step back. On the very day that the centre left government of Prof Romano Prodi was hailing the return of the lira to the ERM as a sign of Italy's "new found stability", Mr Prodi himself received an indictment request for alleged "abuse of public office".

Rome's deputy public prosecutor, Ms Giuseppa Geremia, has asked that Mr Prodi and five other members of the board of the state holding giant, IRI, be charged in relation to alleged irregularities in October 1993 relating to the sale of the foods processing concern, Cirio, then owned by IRI and sold off as part of a privatisation drive initiated by Mr Prodi, chairman of IRI for most of the 1980s and or a year from May 1993.

The news knocked the Milan stock market back and developments will be closely watched, by market dealers.

Mr Prodi responded: "I will explain, as I've always explained, the correctness of our actions. I have no problems with this".

After eight hours of negotiations between EU finance ministers and central bankers in Brussels on Sunday, the lira, was readmitted to the ERM at a rate of 990 against the mark.