Private equity investors have committed to buy up to €1.1 billion of the State's shares in Bank of Ireland, it was confirmed this morning.

Following the deal the Government will own a maximum of 32 per cent in the bank meaning the institution will avoid falling under State control as had been expected. The move also reduces the State's obligation to capitalise Bank of Ireland as part of stress tests announced in March.

Canadian finance group Fairfax is leading the consortium of new investors. New York private equity group WL Ross is also involved.

Private investors' stake in Bank of Ireland will be a minimum of 68 per cent following a share sale this week.

The deal was reached in the early hours of this morning after initial talks between the Government and investors on a possible investment ended without agreement at about 6pm last night. Sources close to the negotiations yesterday afternoon had played down the likelihood of a deal being concluded.

"Foreign investment in Bank of Ireland is an important milestone for the government... It sends a positive signal to the market after what has been a fairly miserable 18 months for the Irish banking sector," Glas Securities wrote in a note.

Investors are to initially purchase on an unconditional basis €241 million of the State's shareholding and have to purchase the remainder of up to €882 million after regulatory approval has been obtained. In all, investors will purchase 4.2 billion ordinary shares.

Depending on the results of the rights issue, Ireland will end up with between 15 and 32 per cent of the bank. Existing shareholders will hold between 31 and 71 per cent and the new investors will hold between 14 per cent and 37 per cent.

The bank's shares were up 1 per cent to 0.11 cents by 3.18pm

"The commitment by a number of significant private sector investors to invest side-by-side with the State's retained holding without any form of additional risk sharing by the State reaffirms the credibility of our stress tests... it further underlines how we are successfully breaking the link between bank risk and the Sovereign," said Minister for Finance Michael Noonan in a statement.

"This investment is tangible proof of growing international confidence in the future prospects of both Bank of Ireland and the Irish economy," he added.

Additional reporting: Reuters/Bloomberg