The deal would be the biggest merger ever in Ireland, creating the country's third-largest financial services group.
Abbey's deputy chief executive, Charles Toner, yesterday dismissed City speculation that the British bank had planned its own move on Irish Permanent.
Mr Toner said Abbey never had any firm plans for the stake, acquired when Irish Permanent floated four years ago. In any case, Irish Permanent was granted takeover protection for five years, and that only lapses next year.
"Ireland is a market we have looked at from time to time," said Mr Toner. "But it is not a very big market. We are looking at developments. But our position has not changed."
News of the talks was well received by the market. Irish Life, which is twice the size of Irish Permanent, has been looking for a branch network through which to sell its products.
Insurance analyst Eamonn Flanagan at Charterhouse Tilney said Irish Life was a better fit for Irish Permanent. "From a strategic point of view Abbey would not have much to add. It has nothing else in Ireland. They would still be selling mortgage products and would be a very small part of a bigger business."Reuse content