The Bank of England has voiced concerns about overheating in the Irish economy, warning that huge increases in property prices and mortgage finance here pose risks for the financial stability of other EU states, including Britain.

In its mid-year Financial Stability Review, Bank of England deputy governor, Mr David Clementi, stressed the need for central banks and regulators to keep a close eye on developments within the Irish economy.

It also raises the question whether domestic banks in states such as the Republic would be robust enough to withstand any subsequent correction or drop in property prices.

Another concern is whether there could be contagion to the rest of the euro zone, and the UK.

A spokesman for the Central Bank of Ireland said the comments echoed many of the sentiments already expressed by the Bank at regular intervals. On Wednesday, it again noted signs of overheating and forecast that inflation was likely to remain significantly above the euro-zone average for some time.

The Bank has begun stress-testing financial institutions here - examining how well placed the various financial institutions are to weather shocks such as further increases in inflation or a slowdown in economic growth.

The Bank of England highlights the growth differentials throughout the euro zone, with states, such as the Republic, that enjoy strong growth also featuring above-average inflation.

"The variations in inflation give rise to differences in real interest rates, implying that monetary conditions are looser in states with the highest inflation," according to the review.

It also refers to the high rates of credit expansion, with Ireland and Portugal at the forefront with lending growing by 20 per cent, double the rate of France and Germany. The bank states there is a close link between credit growth and asset price increases, in particular mortgage lending and house prices.

The Bank of England says the exposure of Irish banks to the international interbank markets has increased as a result of this growth. Also, with a high proportion of floating-rate debt in Ireland and Portugal, any increase in ECB interest rates is likely to have a greater effect on expenditure there than elsewhere in the euro area.

"The combined UK banking exposures to some of the potentially overheating economies are substantial. Exposure to the Netherlands are large and together with Ireland and Portugal they are similar to those of France or Germany. It is important that each state's regulatory and other financial stability authorities keep a close eye on banking system risk."