Financial consultants Merrill Lynch told the Minister for Finance that such an extensive guarantee over liabilities at the State's main banks would "hit the national rating" and allow poorer banks to continue in operation.

Details of the meeting, which took place three days before the guarantee was announced on September 29th, were revealed in a Merrill Lynch memorandum.

Merrill Lynch advised strongly against a policy of liquidation or letting a bank become insolvent, saying "this was the worst thing that could be done" as it would accelerate trouble for all other institution.

In another document from Merrill Lynch, dated September 29th, the Government was again warned against underwriting the liabilities as the scale of such the guarantee could exceed €500 billion.

"This would almost certainly negatively impact the State's sovereign credit rating and raise issues as to its credibility," Merrill Lynch said in an emailed document detailing the pros and cons of various interventions.

"The wider market will be aware that Ireland could not afford to cover the full amount if required. It might also be poorly perceived by other European states if they come under pressure to do the same as liquidity flows migrate," it added.

Merrill Lynch proposed an alternative to the guarantee scheme in the form of "secured lending scheme" for banks whereby commercial property could be exchanged for Government bonds or cash.

The Government has been widely criticised for the extent of its guarantee, announced at the end of September 2008, because of the potential cost to the State.

Taoiseach Brian Cowen and Minister for Finance Brian Lenihan have long maintained the Government followed the best advice given to it at the time.