Shares in Ryanair closed 3.58 per cent weaker yesterday after the European Commission initiated a formal investigation into whether concessions gained at its Belgian hub were illegal.

The Commission said it had "doubts" about Ryanair's deal at Brussels South Charleroi Airport in the Walloon region. It said the measures "exclusively benefit Ryanair and might consititute state aid incompatible with the proper functioning of the internal market".

The Commission's claim that the Walloon authorities granted exlusive consessions to Ryanair brought it into immediate conflict with the airline, which claimed its arrangements were "non-exclusive".

Dismissing the investigation as an act of "stupidity", Ryanair's chief executive, Mr Michael O'Leary, said the same incentives were available to any other airline which invested on a like-for-like basis at the airport.

The decision by the Commission to open a formal investigation follows a year-long informal inquiry into the nature of Ryanair's deal with the owners of Charleroi airport.

Expressing confidence that the airline would be cleared in the inquiry, Mr O'Leary said the airline was offering a cheap seats' incentive on services from Charleroi in response.

If it is proved that the conditions enjoyed by Ryanair distort competition, it could have a severe impact on Ryanair's strategy of growth through the creation of regional hubs at minor airports. Charleroi is one of two Ryanair hubs on the Continent. The other is Frankfurt Hahn; a third at Milan Bergamo will open in the new year.

But Mr O'Leary questioned what the upshot would be if the Commission found against Ryanair, suggesting that incentives to develop all state-run airports would be brought to an end. He wanted to meet soon with the Transport Commissioner, Ms Loyola de Palacio, and claimed the investigation would drag on for up to 10 years because there was no basis to the allegations.

In addition to its examination of the landing fees, the Commission wants to look at concessions on ground-handling and other prices granted to Ryanair by the airport company. The Commission said it did not seek to question the development of "low cost" aviation, but wanted to ensure a level playing field. Ms De Palacio said the Commission was not investigating Ryanair's operations at any other airports.

Analysts said the investigation could not be dismissed, but they expressed confidence that Ryanair would be cleared. Mr John Mattimoe at Merrion Stockbrokers said the airline's deal was not exclusive, adding that similar or more favourable deals were available at the privately-owned Frankfurt-Hahn and Milan Bergamo. He added: "We understand that Ryanair submitted a draft of its agreement with the airport to the EU for informal comments before finalising the cost deal and that the informal feedback from the EU was that the draft agreement appeared not to fall foul of regulations."

Mr Shane Matthews at NCB Stockbrokers described the 26-cent fall to €7 in Ryanair shares as a "storm in a teacup". He did not believe that Ryanair would be forced to change either its strategy or business model.

Another Dublin analyst saw the investigation as a lever to demonstrate to state airlines under pressure from the EU that government support for the industry will no longer be tolerated.

Separately yesterday, the Commission called on the Greek government to recover €194 million in "illegal" aid to Olympic Airways, a development likely to threaten its viability.

The Greek government, which is planning to privatise the airline, has said it will appeal the ruling.