The Irish Government said today that it was drawing up a compensation scheme for investors in Anglo Irish Bank after the surprise decision last night to pull €1.5 billion (£1.3 billion) in funding and nationalise the ailing lender.

Shares in Anglo Irish Bank were suspended this morning in London and Dublin after it emerged yesterday that it would not receive a planned cash injection from the Government, but instead would be taken into state ownership.

The Government pledged that it would retain all 1,700 staff at the bank, and that shareholder rights would be respected in the takeover, with compensation plans to be drawn up.

A meeting with shareholders was scheduled to be held today to discuss the €1.5 billion rescue plan.

However, the meeting has been cancelled because the Irish Government said it no longer believed that injecting more money into the bank would help the company to recover.

But the European Commission said that it would investigate whether the deal would breach EU competition rules.

Jonathan Todd, an EU spokesman, said that Brian Lenihan, the Irish Finance Minister, told Neelie Kroes, the EU Competition Commissioner, of the plan last night.

"We will be looking at the terms and conditions of the transaction in coming days to see if there are elements of state aid," Mr Todd said.

"We are not aware of the details at this stage.”

At a press conference held at government buildings, Mr Lenihan said the admission last month by Sean FitzPatrick, the former chairman, that he had taken secret loans of more than €87 million over a period of eight years had caused “serious reputational damage” to the bank.

Mr FitzPatrick resigned, admitting “inappropriate” behaviour but denying having done anything illegal.

David Drumm, the chief executive, also resigned along with two top executives. Patrick Neary, the financial regulator, announced his early retirement last Friday.

The Government said: "The funding position of the bank has weakened, and unacceptable practices that took place within it have caused serious reputational damage to the bank at a time when overall market sentiment towards it was negative.

“Accordingly, the Government believes that the recapitalisation is not now the appropriate and effective means to secure its continued viability.

“Therefore, the Government must move to the final and decisive step of public ownership.”

Mr Lenihan said: “Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland.

“Anglo has a balance sheet of some €100 billion with a substantial deposit base which the state is determined to safeguard. The Government has made clear that it will ensure its continued viability.

"Anglo Irish Bank will continue to trade normally as a going concern, with appropriate government support as necessary.”

Donal O’Connor, who had replaced Mr FitzPatrick, will stay on as chairman of Anglo Irish Bank.

Legislation to nationalise the bank will be presented to the Houses of the Oireachtas, the national parliament, on Tuesday.

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