Allied Irish Banks PLC (AIB) said Monday it needs an additional EUR1.5 billion in fresh capital on top of EUR3.5 billion the government promised to inject two months ago, aiming to raise the extra funds through asset sales by the end of this year.

The bank said market worries about its capital strength had persisted since February, when the state cash was offered, and that government-sponsored stress tests showed it needed more funds than previously thought.

Irish Finance Minister Brian Lenihan welcomed the AIB move, which he said would boost confidence in the bank's ability to cope with the current crisis and emerge from it in better shape.

"The strengthening of its capital position will improve the bank's balance sheet and better position it to lend to businesses in support of Ireland's economic recovery," a ministry statement said.

It said the due-diligence process will continue until the middle of May, when AIB's state recapitalization should be completed. "At this stage, the minister has no reason to anticipate any further problems will emerge," the statement said.

The same stress tests were applied to Bank of Ireland PLC (IRE), which is also to receive EUR3.5 billion worth of state funds, but the government found it needed no additional cash.

An AIB spokesman said it was too early to say which assets the bank may sell, though an analyst noted that it has a 24% stake in M&T Bank (MTB) in the U.S. and about 70% in Poland's Bank Zachodni (BZW.WA).

AIB's Bank Zachodni stake has a market value of around EUR884 million. The Polish bank declined to comment on speculation that AIB may sell it.

The bank's decision to boost capital by selling assets marks a turnaround from its earlier stance and follows a government decision that any further capital injections from the state would be in the form of equity capital.

The analyst estimated that raising EUR1.5 billion through new equity at AIB's current share price would result in a 65% dilution for existing shareholders.

At 1048 GMT, AIB shares in London were up 6 pence, or 6.3%, at 97 pence, outperforming the Stoxx Europe 600 banks index, which was down 2.5%. In Dublin, the shares were up 13%. They have fallen by around 44% since the start of 2009 and are down almost 93% in the last year.

Last month, AIB said 2008 net profit fell 61% due the Irish property market crash and a surge in impairment charges and said the operating environment remains "extremely difficult."

For the year, net profit dipped to EUR767 million from EUR1.95 billion in 2007. There was a significant deterioration in asset quality, most notably in property, the bank said at the time.

AIB also said it will take part in the government's planned National Asset Management Agency (NAMA), the details of which are still being thrashed out.

In its statement Monday, the Finance Ministry said it doesn't intend to nationalize either AIB or Bank of Ireland.

"The minister considers it important that these banks continue to have a market presence and to operate within market disciplines and constraints," it said but reiterated that any further capital injections from the state would be in the form of equity capital and would therefore increase the level of state ownership.

Irish banks have been hit hard by the financial crisis since the country's real-estate boom fizzled out, forcing the government to launch a EUR440 billion two-year deposit guarantee plan and to set up the NAMA, which is to soak up bad bank debts.

Apart from recapitalizing AIB and Bank of Ireland, the government has taken Anglo Irish Bank Corp. into full state ownership.

Company Web site: http://www.aib.com

-By Digby Larner, Dow Jones Newswires; +33 1 4017 1748; digby.larner@dowjones.com

(Malgorzata Halaba in Warsaw and Kimberly Vlach contributed to this item.)