Any increase in corporation tax in the South could have a "dramatic effect" on the Irish economy, the head of a leading think-tank has warned.

Boosting the Republic's low rate of 12.5% has been raised as a possible condition of any EU bailout of the southern economy.

But chief executive of the Irish Management Institute (IMI), Dr Tom McCarthy, said any adjustment in the country's corporation tax rate would have serious consequences for multinationals based in the Republic and was likely to see a number of businesses leaving Ireland for more business-friendly jurisdictions.

"The corporation tax rate has helped build up the credibility of Ireland as a business-friendly country for a number of years - but that can be lost at a stroke," he said.

"There has been much more to it than just the tax rate - questions of access to Government and so on also contribute - but the 12.5% rate has underpinned everything.

"I am fearful of what may happen if that is increased. You can't expect companies to look at our situation here and say to themselves, 'Well, Ireland is in real trouble and needs to bump the tax rate up for four years or impose a temporary levy, but that's okay because we've been here for years and have a good relationship with the country.'

"That may wash here but back in the boardroom in New York, it's a numbers game.

"The decision to stay in Ireland will not be made in Ireland."

Dr McCarthy's sentiments were echoed by National Irish Bank's chief economist Dr Ronnie O'Toole, who described the talk of raising the corporation tax rate as "perverse".

All measures seem to be on the table as the Government tries to calm the markets, but a hike in the tax rate could serve to create more trouble for Ireland in the immediate term, according to Dr O'Toole.

He said: "Investors will understand that increasing the tax rate will threaten the export sector, which has performed well, so there will be even more unwillingness to lend to Ireland.

"We are not convinced it will do any good to change it."