The value of property assets held by prominent Irish developers has collapsed to ruinous levels.

So dire has the situation become that Allied Irish Bank (AIB) has written down by almost two-thirds the value of property held by some major developers in the Dublin area.

It is understood that the bank has recently re-valued the loans selected at random from €700m to €250m, an astonishing write-down which indicates the extent of the crisis facing all of Ireland's major banks.

The extent of the potential bad debts in some of the banks is said to have caused shock in Irish Government circles.

ACC Bank, which is about to close eight branches as part of its cost-cutting measures, has valued parts of its property portfolio at between 35 and 40 per cent of what was loaned to buy them.

Banking sources say the same level of write-down could be applied to all of the major financial institutions in Ireland.

These loans mainly relate to land-banks purchased at the height of the property boom and earmarked for developments, which cannot now go ahead because of a collapse in demand and lack of development finance.

Yesterday, the Republic's Construction Industry Federation president, Hank Fogarty, of SIAC Construction, warned: "If the property markets are allowed to fall even further below their long-run equilibrium level, the worst fears about the economy's and the banking system's exposure to property will be realised."

It is understood that Pricewaterhouse Coopers (PwC) and Merrill Lynch have been drafted in by the Government to comb through the loan books of troubled Irish banks before the full details of the 'guarantee scheme' will be revealed.

The crippling levels of debts held by the banks relating to their property portfolios are behind the free-fall in Irish bank shares, which saw Bank of Ireland stock tumbling by almost 50 per cent in five days to their lowest levels in a decade.

There is also a widespread belief that the major banks are lending some developers further cash to pay their interest bills, which means that they are not classified as 'bad debts'.

Merrion Capital has forecast staggering write-downs at the country's two biggest banks, the brokerage predicting that AIB will write off €5.3bn while Bank of Ireland may write off €4.5bn

Some of the Irish financial institutions have massive exposure to property lending. Anglo Irish Bank and the Irish Nationwide Building Society have up to 80 per cent exposure to commercial lending, while AIB have 37 per cent exposure and the Bank of Ireland is believed to be about 30 per cent.

It is believed that the real state of the two main banks' property loans books is now being reported directly to AIB chairman Dermot Gleeson and Richard Burrows, chairman of the Bank of Ireland.