The ISEQ rose 8%, the most among European benchmarks, as it recovered from the steepest slump in quarter of a century on Monday.
The markets were reacting to a move by the Irish Government which guaranteed the deposits and borrowings of six banks for two years.
The Government feared that at least one Irish banks was at risk of collapse according to Defence Minister Willie O’Dea.
Anglo-Irish Bank surged 67% in its biggest one-day gain since January 1987, while Irish Life & Permanent jumped 36%, the biggest increase since November 1994.
This came as a welcome relief after both stocks slumped 46% and 38% respectively on Monday.
Ireland’s benchmark ISEQ Index rose 259.11 to 3,550.63 yesterday. It lost 13% on Monday, its steepest drop since 1983. The ISEQ index has now lost 49% of its value this year.
The Government said yesterday it will guarantee all deposits, covered bonds, senior debt and dated subordinated debt of four publicly traded banks and two building societies.
Deirdre Ryan of Goodbody Stockbrokers said: “This latest move to safeguard all deposits is arguably a sorely needed boost to confidence in the Irish financial system and the economy overall.
“With governments across the globe stepping up to the plate in recent days, the Irish Government has not been found wanting.”
Anglo Irish gained €1.54 to €3.84 and Irish Life added €1.28 to €4.85. AIB rose 90 cents to €5.90, while Bank of Ireland jumped 68 cents to €3.95.
In the construction sector, CRH fell a further 37c to €15.00, Kingspan gained 25c to €6.40, while Grafton gained 8c to €3.23.
Ryanair added 2c to €2.26, Kerry Group progressed €1.15 to €20.80, while pharmaceutical company Elan moved up 32c to €7.35.
In Britain, the FTSE 100 Index rebounded yesterday, trimming its biggest monthly slump since 1987, on speculation that the US government’s $700 billion bank rescue plan will be revived and as mining shares rallied.
The benchmark FTSE 100 index added 83.68, or 1.7%, to 4,902.45 having swung between gains and losses at least 16 times in the session.
The Central Bank said yesterday that recent international events have been unprecedented and have had a very significant impact on global money markets resulting in serious consequences for financial institutions internationally. The Central Bank made particular reference to: “the increasingly negative impact these developments have had on the availability of funding for Irish credit institutions.
“Following consultation with the Central Bank and Financial Regulator, the Government decided to put in place a guarantee arrangement. This decision was taken with a view to protecting financial stability while enabling credit institutions to access funds and provide credit to companies and households.”