The Irish market gained more than £1 billion in value as bank shares soared following confirmation that the Government aimed to reduce corporation tax to 12.5 per cent by 2006.

The Minister for Finance cut the standard corporation tax rate to 32 per cent from 36 per cent in Wednesday's Budget and said substantial progress must be made in reducing the standard rate of corporation tax in each budget over the coming years.

The two main banking shares galloped to all-time highs on the news and other financial shares made significant gains. Manufacturing companies already pay a reduced rate of corporation tax of 10 per cent; so financial and service companies stand to benefit most from the changes.

"It's the first official confirmation we've had of a significantly lower tax rate going forward and that is being priced into the market," one equity dealer said.

In addition to the reduced rate of corporation tax, Mr McCreevy also slashed capital gains tax from 40 per cent to 20 per cent which should significantly boost private client business, traders said.

"It's the first equity-friendly budget we've had. Usually it's fairly neutral," one equity dealer said.

The positive Budget changes, allied to a strong performance by the FTSE100, which closed 2.25 per cent higher, helped the ISEQ index of Irish shares gain 120.62 points or 3.15 per cent to close at an all-time high of 3,952.14.

The financial sector led the way with the financial index gaining 6.75 per cent or £1.9 billion in value compared with 0.89 per cent or £189 million for the general index. "The banks have had a pretty phenomenal day," one trader said.

Allied Irish Banks raced to a record high of 675p before closing at 670p, a gain of 48p on the day. Bank of Ireland hit the 1,000p level before slipping back slightly to close at 993p, 63p higher.

Traders said the banks were also boosted by the £517 million tax giveaway announced in the Budget which would boost consumer spending and general economic activity. "That will filter back to the two main banks which dominate financial services activity in Ireland," one trader said.

The sector was also cheered by merger and acquisition speculation in the industry overseas as ABN Amro and National Westminster Bank dismissed a press report that they were in merger talks.

Other financial shares to benefit from the general buoyancy included Irish Life, which gained 26 1/2p to 387p, Irish Permanent which added 35p to 700p and Anglo Irish Bank, up 5p at 117p.

The performance of industrial stocks was more muted although CRH managed a 27p gain to 815p. Smurfit edged up to close at 202p, a modest rise of 3p.

Greencore, which announced that pre-tax profits fell by 9 per cent to £49.7 million for the year to end-September, lost 2p to 309p. Dealers said the market was disappointed at the lack of news on the acquisition front.