If it goes ahead, the merger will be the country's largest at 2.4bn punts ($3.44bn) and create its third biggest financial group after Allied Irish Banks and Bank of Ireland.

"The boards of Irish Permanent and Irish Life announce that preliminary discussions in respect of a possible merger have been held recently," the companies said in a statement.

Company officials stressed that the talks were at an early stage.

The stock exchange in Dublin was closed for a public holiday, but shares in both companies soared in London.

Irish Permanent shares closed up 72 1/2p at 882 1/2p after hitting 885p at one point.

Irish Life closed up 50p at 529 1/2p after reaching 535p earlier in the day.

Looking to Europe

The merged group would combine Irish Life's experience in investments and life assurance with Irish Permanent's estimated 20% share of Ireland's mortgage market and its extensive network of bank branches.

The combined group would employ more than 3,000 people and have assets of around 15bn punts.

Irish Life would account for two thirds of the group's capitalisation.

The two companies are no longer just looking to their domestic market, but are competing in the wider European market.

Banks have been especially keen to tap into the lucrative insurance market, where Europe's ageing population and rising wealth has created buoyant demand.

Analysts say the deal would make strategic sense for both companies as they need scale to be strong in both domestic and European markets.

The news set the UK insurance sector alight which is seen as ripe for consolidation.

The sector finished higher on the day on hopes of more merger or acquisition news to come.