Irish bank shares fell sharply Friday, underperforming the European finance sector, following the nationalization of scandal-hit Anglo Irish Bank Corp. (ANGL.DB).

At 1155 GMT, Allied Irish Banks PLC (AIB) shares were down EUR0.29 or 15% at EUR1.65, Bank of Ireland PLC (IRE) down EUR0.06, or 6.7% at EUR0.84, while Irish Life & Permanent PLC (APM.DB) was EUR0.09 lower, or 4% at EUR2.16.

The Stoxx Europe 600 banks index was up 3.3%, buoyed by news that the U.S. plans to provide Bank of America Corp (BAC) with an additional $20 billion.

The cost of insuring sovereign bonds issued by Ireland against default rose significantly, traders said. Early Friday, Irish sovereign credit default swaps were quoted at 240/290 basis points by one trader. Another trader said he had seen the contract bid at 230 basis points but that there had been no offers to sell protection during the morning.

CDS are tradable, over-the-counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries.

The spread widening was in reaction to concerns that, by nationalizing Anglo Irish Bank, the Irish government has increased the amount of risk on its balance sheet.

"The nationalization of Anglo-Irish is yet another intervention too many," said Societe Generale fixed income analyst Ciaran O'Hagan, adding that governments need to be more selective in who they rescue.

However, Irish bank CDS spreads were quoted tighter across the board, with Anglo Irish bank five-year senior CDS around 250 basis points tighter, with subordinated CDS a huge 450 basis points tighter.

Five year senior CDS written on Bank of Ireland and Irish Life & Permanent were around 20 basis points tighter, while Allied Irish tightened around 35 basis points.

Anglo Irish requested that its shares were suspended Friday on the Irish and London stock exchanges. The Irish government said late Thursday it will take control of Anglo Irish to secure its continued viability after taking hits from an accounting scandal and the broader financial crisis.

Company Web site: www.angloirishbank.ie

-By Vladimir Guevarra, Dow Jones Newswires, +44 (0) 20 7842 9486, vladimir.guevarra@dowjones.com

(Michael Wilson and Mark Brown contributed to this item.)

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