Shares in Aer Lingus rose 17 percent on Wednesday, but this was well short of Ryanair's offer at a 38 percent premium, reflecting market doubts about the deal.

Ryanair, already the largest shareholder in Aer Lingus with a 30 percent stake, announced the surprise bid after markets closed on Tuesday, saying it would pay 1.30 euros per share in a bid to increase its stake to at least 50 percent.

The acquisition of Ireland's 75-year-old former flag carrier would fulfil a long-held ambition of Ryanair Chief Executive Michael O'Leary, capping his transformation of an airline that started with one plane in 1985 into one of Europe's largest.

But the Irish government and European competition authorities, two key parties that helped block two earlier bids by Ryanair, refused to say whether they would back the bid.

"Some of the market clearly does not believe Ryanair will be allowed buy it," said Alan Duff, a trader with NCB stockbrokers in Dublin.

"There are a lot of unknowns that haven't been ironed out. People are waiting for more clarification on the anti-trust side of the deal."

Aer Lingus' second-largest shareholder is Ireland's government, which recently announced plans to sell its 25 percent stake and has in the past opposed a merger.

But, under pressure from its EU/IMF creditors to begin selling off state assets to help pay off debts, Prime Minister Enda Kenny said it had not yet decided whether to back the bid.

Ryanair's bid, which values the company at 694 million euros (560 million pounds), would earn the government 174 million euros, our of a 3 billion euro privatisation target.

"The government would be concerned obviously in terms of competition, in terms of consumer facilities, in terms of price and access to the country," Kenny told parliament. "But details of the offer have not yet been considered."

COMPETITION CONCERN

Officials at the European Commission, which blocked Ryanair's last bid for Aer Lingus in 2007 on competition grounds, are to meet on Wednesday to discuss the bid, Kenny said. A spokesman for the commission said it had not been informed of the deal and was not currently investigating.

Ryanair said in a statement that an increase in capacity at Dublin airport and a decrease in competition in European aviation made it believe regulatory approval could be secured.

But Britain's Office of Fair Trading last week ruled that Ryanair's ownership of its current minority stake threatened competition in the sector.

Ryanair has a "reasonable chance" of securing approval from 20 percent of the remaining 45 percent, most owned by private shareholders, said Merrion Capital analyst Gerard Moore.

Irish businessman Denis O'Brien, who owns 3.8 percent declined immediate comment as did Abu Dhabi's flagship carrier Etihad. Etihad, which owns 3 percent, has been named in the media as a possible bidder for the government's 25 percent stake

"The alternative plot is that O'Leary knows he won't get regulatory approval and this is just a plan to flush Etihad out and to get them move and make a counter bid," Moore said.

He said the bid may set 1.30 euros as the minimum price for a sale of Ryanair's stake, which has lost more than half of its value since it began to buy it in 2006.

Aer Lingus shares were up 17.02 percent at 1225 GMT, with Ryanair up 0.5 percent while the broader Irish market was down 0.5 percent. (Reporting by Conor Humphries; Additional reporting by Foo Yun Chee; Editing by Dan Lalor and Hans-Juergen Peters)

• A Permanent Economic Emergency