Allied Irish Banks (AIB) has merged its Allfirst subsidary, engulfed earlier this year by a currency trading scandal, with another US bank.

AIB said on Thursday it had agreed to combine Allfirst with regional US bank M&T Corporation in a deal worth a total of $3.1bn (�2.1bn).

Under the deal, AIB will own 22.5% of the new bank, which has a 700 strong branch network spread across six US states.

The Irish bank will also pocket $886m in cash.

"AIB's patnership with M&T is the ideal opportunity for us to reposition and strengthen our involvement in regional US banking," said AIB chief executive Michael Buckley.

Investors welcomed the news, marking AIB shares up 13% to 12.96 euros in lunchtime trade.

Tainted

AIB's reputation was heavily tarnished earlier this year when it emerged that one of Allfirst's foreign exchange dealers had hidden trading losses amounting to about $750m.

The incident ranks alongside the 1995 collapse of Barings bank at the hands of rogue trader Nick Leeson as one of the biggest scandals in banking history.

The trader at the centre of the Allfirst scandal, John Rusnak, pleaded not guilty to fraud charges in the US earlier this year.

Investor pressure

AIB investors, who criticised AIB for failing to exercise adequate controls, put the bank under pressure to ditch Allfirst altogether in the wake of the scandal.

But AIB was reported to be reluctant to abandon what it saw as a valuable foothold in the US market.

The Allfirst affair triggered a plunge in AIB's share price, prompting speculation that it could become a takeover target.

But the Irish bank has since emerged from the incident more or less unscathed.

In July, AIB turned in a 5% increase in first-half profits and said its strong performance showed that it had put the Allfirst affair behind it.