Britain is expected to foot an estimated £7 billion bill for the Irish bail-out, but there are fears the cost would be far greater to the UK if Ireland’s embattled economy failed.

Chancellor George Osborne said yesterday that it was in Britain’s national interest to commit billions of pounds to help bail out the Irish economy.

He said the UK is making a separate bilateral contribution to the rescue package to reflect the fact that it is not in the euro, and confirmed Britain’s total exposure is “around” £7 billion.

The Irish government confirmed on Sunday night it was seeking the bailout funds and talks are under way to confirm details of the package negotiated with the EU and the International Monetary Fund. The UK has also offered a separate loan.

Mr Osborne told BBC Radio 4’s Today programme: “What we have committed to do is to be partners, as shareholders in the International Monetary Fund, in an international rescue of the Irish economy. But we have also made a commitment to consider a bilateral loan that reflects the fact we are not part of the euro and don’t want to be part of the euro.

“Ireland is our very closest economic neighbour. I judged it to be in our national interest to be part of the international efforts to help the Irish.”

Asked to confirm the £7 billion figure, Mr Osborne replied: “It’s around that. It’s in the billions, not the tens of billions.”

The International Monetary Fund sent out a stark warning earlier this month that the UK economy could be highly vulnerable to economic shock in the troubled country.

The IMF said the exposure of UK banks to Ireland could hit the wider economic recovery, with British bank loans to troubled eurozone members such as Ireland, Greece and Spain accounting for around 14 per cent of gross domestic product.

British bank shares have suffered in recent days as experts estimated how much bank cash is on the line.

Bank of England governor Mervyn King admitted last week the issue was “by no means trivial” to UK banks and growth in the euro area was “a very important ingredient” to economic prospects on these shores.

The heaviest exposure is seen within Royal Bank of Scotland through its Ulster Bank subsidiary and fellow part-nationalised player Lloyds Banking Group – at a reported £54 billion and £27 billion respectively.

The figure is thought to be more than £100 billion across the entire UK banking industry, with exposure through direct loans to Irish banks and in Irish sovereign debt.

It is therefore no surprise that the UK is a strong supporter of plans to prevent Ireland defaulting and is prepared to cough up an estimated £7 billion, including its share of IMF and European Union funding as well as bilateral loans. Aside from the banking vulnerability, Ireland is also a major trading partner for the UK.

Scott Corfe, an economist at the Centre for Economics and Business Research estimated that UK exports of goods and services to Ireland are 26 per cent higher than those to the emerging market powerhouses of China, Russia, India and Brazil combined.

“Should the UK participate in an Irish bail-out? Undoubtedly yes,” said the CEBR.

“We cannot afford to have such a major market collapse on us.”

British borrowers also have an incentive in seeing an end to Ireland’s debt woes, given that lending would tighten even further if banks were forced to write off billions.

Irish banks also have an important role to play in UK lending – accounting for seven per cent of corporate loans and three per cent of household loans, according to the IMF – and having the sector on a firmer footing would avoid an additional credit squeeze.

Stock markets were higher today as investors breathed a sigh of relief at news of an imminent aid package for Ireland, with the FTSE 100 Index up 0.6 per cent and banks making a tentative bounce-back.

Oil prices also recovered in response, rising to near $83 a barrel.

But there are fears that other European debt crises may be waiting in the wings.

Portugal, Spain and Greece are all on debt-watch and pose equally serious threats to the British banking sector.

As ING Bank expert Oscar Bernal said: “Concerns that the Irish crisis spreads to other countries and threatens the euro remain vivid, as there still isn’t any formal crisis resolution mechanism in the eurozone beyond the European system of financial supervisors.

“In this respect, we doubt that markets will be comforted durably by the Irish bail-out, which is likely to prove only a small and temporary victory.”