But that does not mean they won't rise even further as sentiment over the prospects for the Thai economy continues to improve, fund managers and banking analysts said.

Thai banks are viewed as proxies for the Thai stock market and are natural targets for foreign funds looking to return to the Thai equity market after a long absence.

Their fundamentals are not upper most in investors' minds.

"The prospects for Thai banks are still not particularly good but recent concerns over the sector have eased and sentiment for Thailand has improved," said chief investment officer at Nakornthon Schroder Asset Management Douglas Cairns.

Shares in Thai banks were hit hard by the severe economic crisis that swept across Thailand after the July 1997 devaluation of the Thai baht, which saw the currency drop to an all-time low of 56.90 to the dollar from around 25.

The baht'scrash revealed woefully inadequate supervision of Thai banks, which had allowed customers to borrow vast sums based on inflated property prices and other flimsy collateral.

Now, a third of bank loans have soured and the sector needs to raise $20 billion to $30 billion to recapitalise.

The country's biggest commercial bank, Bangkok Bank, saw its shares plummet to under 20 baht in September from around 180 when the Thai currency was first floated.

The pattern was repeated for other banks and the Stock Exchange of Thailand (SET) bank sector index collapsed to just 82 points from 700 in July 1997.

But in August, the Thai government proposed a comprehensive scheme to reorganise the sector, merging some banks and finance companies and pumping money back into the survivors.

It announced a recapitalisation scheme under which banks could swap their own share capital or subordinated debt for up to 300 billion baht of domestic bonds from the government.

News of the plan took a while to sink in but by earlySeptember investors' attitudes to Thai banks began to improve and shares in the sector started to climb.

Three months on, Bangkok Bank shares are at 52 baht and the SET bank index stands at 273.65, a rise of over 230 per cent.

After the rapid rise, Thai banks began to falter at the end of November as investors pondered the likely impact on the banks of accepting government help to recapitalise.

Swapping capital for debt involves an inevitable dilution for existing shareholdings and there are also fears the banks will have to write down the par value of their shares when they admit that much of their loan portfolio is lost forever.

Siam Commercial Bank, the first of Thailand's top five banks to accept government help to boost its tier-one capital, said this week it would not have to write down capital, boosting sentiment for all Thai banks.

Analysts said other banks may have to accept write-downs but that does not necessarily mean their shares will suffer.

Large institutional investors appeared tobe ignoring the threat of dilution and were still coming into the Thai market and gradually increasing weighting in Thai bank stocks.

Asian banks analyst at Salomon Smith Barney Donaldson Hartman, said he would not suggest bailing out of Thai banks though Thailand's biggest banks had now reached their targets based on future-adjusted book value.

"Liquidity is pushing into this market and that can drive prices," he said, adding Salomon Smith Barney was still long-term overweight on both the Thai markets and the banking sector.

But an analyst at Paribas Asia Equity in Bangkok Alastair MacDonald recommended caution: "When a market has had such a phenomenal run in the short term, the high beta factor sectors that have run most are pretty high risk."