Allied Irish Banks received an approach from a third party for a minority stake, it said on Friday, in what could indicate scope for recovery among Irish banks which have been pummeled by the credit crisis.

Two sources familiar with the matter said the interest came from Canada, though Canada's biggest bank Royal Bank of Canada (RBC) said it was not behind the approach for Ireland's second biggest bank, whose shares closed up more than 6 percent.

Irish state broadcaster RTE reported, without citing any sources, that Canadian Imperial Bank of Commerce had made an approach. A spokesman for CIBC said the bank did not comment on rumors or market speculation.

The Irish bank confirmed it had received an approach but said talks were not expected to progress until there was more clarity on the National Asset Management Agency (NAMA), a bad bank set up by the government to remove banks' risky assets.

Allied Irish Banks notes the recent press comment regarding interest from a third party taking a minority stake in the group and confirms that it has received such interest, it said.

Sources familiar with the matter told Reuters Allied had received an approach from Canada. Royal Bank of Canada denied being in talks with Allied. We are definitely not involved in this deal, a representative of RBC said.

Earlier on Friday, the Irish Times said the potential suitor was believed to be one of top five Canadian lenders, which after RBC and CIBC are Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia.

Robert Sedran, a banking analyst at National Bank Financial in Toronto, said RBC still looked the most likely contender.

TD has clearly decided they are a U.S. bank. Scotia has got the emerging and developing market focus -- international for sure, but not in the mature parts of the banking world. And the other two? I don't even know what to say, Sedran said.

So it's not exactly brain surgery to suggest Royal was more likely.

Canadian banks have survived the global crisis so far in a relatively strong position, while Ireland, the former Celtic Tiger which is now the worst performing euro zone economy, has seen banking scandals and has required a 10 billion euro state investment in the sector.

The purchase of a stake in an Irish bank by a major foreign player could therefore be a much needed vote of confidence in the Irish economy which is also carrying the burden of one of Europe's worst public finances.

POTENTIAL HURDLES

Shares in Allied Irish closed 6.2 percent higher at 2.23. They have recovered from a low of 0.27 euros before the state bailout this year but are still way below the 24 euros they fetched two years ago before Ireland fell into recession.

Bank of Ireland, the country's top bank which like Allied Irish has received 3.5 billion euros in state funds in return for a 25 percent indirect stake, were up 3.6 percent at 2.14 euros after rising as high as 2.27 euros.

NAMA, whose success will determine Allied Irish's fate, still faces several political and legal hurdles including opposition from some members of the junior governing Green Party.

There can be no certainty that these discussions will lead to a proposal to invest in the group or a transaction being concluded, Allied Irish said.

Analysts said foreign suitors could be betting on an eventual recovery in the Irish economy from 2010 or 2011, which would greatly boost profitability at Allied Irish Banks and Bank of Ireland.

I wouldn't be surprised if we heard other instances over the next few months of foreign banks expressing an interest in Irish banks as loans go into NAMA, analyst Anna Lalor at brokerage Goodbody said.

Emer Lang at brokerage Davy also said further suitors could be found, with the banks' valuation dependent on the discount on loans transferred to NAMA, which will have a book value of up to 90 billion euros.

The recent publication of the draft NAMA legislation and the relative 'cheapness' of the Irish banks ... has put the Irish banks firmly back on investors' radar screens, Lang said.

(Additional reporting by Steve Slater and Kate Holton in London and Andrea Hopkins in Toronto; Editing by Hans Peters and David Holmes)

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