AIB rocked by customer withdrawals as Irish talks go on

AIB, which is partly state-owned after a series of bailouts, said in a trading update that customer accounts had been "affected by current adverse international sentiment towards the Irish sovereign and banking sector."

It said the outcome of the discussions on a bailout for the battered eurozone nation "is expected to be important in determining market sentiment and conditions".

Customer deposits accounted for 50 per cent of the bank's overall funding at the end of September and comprised its largest source of income.

Allied Irish Banks also ramped up its planned offer of new shares to raise 6.6 billion euros from an initial 5.4 billion euros, after deciding to scrap the sale of its British division.

The statement came as indebted Ireland appeared set for a bailout package -- the second such eurozone rescue so far this year after Greece was helped in May.

Irish officials and experts from the European Union and the International Monetary Fund began talks Friday over a bailout for the former Celtic Tiger nation.

Ireland's public finances were ravaged by costly banking sector rescues, a property market meltdown and the global recession.

The government has already pumped some 50 billion euros into its stricken banks, pushing its public deficit to 32 per cent of output -- way above the Greek level and more than 10 times the EU limit.

The mission from the EU, ECB and IMF will subject Ireland's books to forensic analysis and could report back as soon as Monday.

AIB has been ordered by the government to raise a total of 10.4 billion euros in fresh cash.

To this end, it agreed last month to raise around 1.5 billion euros from the sale of its 22.4 per cent stake in US group M&T Bank Corp.

Allied Irish Banks has also raised about 2.5 billion euros via the sale of its holding in Polish group Bank Zachodni to Santander of Spain.

CMC Markets analyst Michael Hewson said AIB's problems could be worse than those of British bank Northern Rock, which was taken over by the British government in 2008 after it nearly collapsed during the credit crunch.

"I think it's bigger than Northern Rock - Northern Rock was small fry," Hewson said.

"This shines a stark light on the state of the European banking system and the integrity of the stress tests in the summer," he added.

"Private bond holders are going to have either to take haircuts or some form of debt re-structuring. This is not just an Irish problem. It's a European one and one that needs dealing with."