The rumours added close to €600m to the worth of the bank, pushing its market value above €16 billion.
Head of research at Dolmen Stockbrokers Stuart Draper said: “I would be very cautious about dismissing these kind of rumours at this stage.”
In Britain Jawaid Afsar, a trader at Securityequity in Sheffield, said “there is a rumour that HBOS may bid for Bank of Ireland”.
However, no formal approach has been made because if a bid had been tabled HBOS would have to issue a statement to the London Stock Exchange.
A spokeswoman for Bank of Ireland said it doesn’t comment on speculation while a HBOS spokesman said “we never comment on market rumour and speculation”.
HBOS shares rose 12 pence, or 1.1% to £10.87.
Takeover fever has gripped the British banking sector recently with Barclays bidding to buy ABN Amro, the Dutch banking group, while Fortis, RBOS (Royal Bank of Scotland) and Santander of Spain are preparing to mount a counter bid.
Ironically the market was speculating last week that if the triple bid by Fortis etc fails to materialise for ABN they might turn their attention on AIB, which is the country’s largest bank by market value.
AIB has operations in the US, Britain, Poland as well as Ireland.
It could be broken up to suit the bidders once the deal was done, Eamonn Hughes, banking analyst at Goodbody Stockbrokers commented.
Some analysts believe that Bank of Ireland is better suited to the needs of a British bank like HBOS.
It already owns Halifax in Ireland and would benefit in both markets through a takeover of Bank of Ireland.
Compared with RBOS (Royal Bank of Scotland) HBOS’s presence in Ireland is significantly lower and according to Mr Draper the deal would make a lot of sense.
HBOS has significant fire power in its own right and made profits of €8bn last year, about four times that of Bank of Ireland.
Its Irish subsidiary made pre-tax profits of €213m last year.