The FTSE 250 company bought a 38pc stake in more than 1,000 sq miles of territory in the so-called “Porcupine Basin”, about 100 miles off the west coast of Ireland and in water more than 1,300 ft deep.

The deal sees Cairn become a partner to Providence Resources, the explorer led by Tony O’Reilly Jr, as well as to Chrysaor and Sosina, which both sold down part of their stakes to Cairn.

Two discoveries were made in the area, the Burren oil find in 1978 and Spanish Point gas-condensate in 1981, but were not developed. No wells have been drilled in the block in the three decades since.

However, analysis in 2011 of the historical finds suggested there could potentially be hundreds of millions of barrels of oil to be extracted.

The deal also gives Cairn options on nearby, undrilled exploration blocks, where it plans to carry out seismic surveying work.

The discovery of Providence’s Barryroe field off Ireland last year, the first find to be deemed commercially viable, has raised hopes the country could be on the verge of an oil boom that could transform its economy.

Under Tuesday’s deal, Cairn will pay $4.1m to cover a share of historic costs and said it would cover 63pc of future exploration and appraisal costs for up to two wells, subject to a cap.

Analysts at Jefferies said Cairn was likely to end up paying $85m in total exploration costs for the programme, of which it will become operator.

The company has been picking up new exploration access in countries including Morocco and Senegal after a high profile drilling campaign off Greenland failed to find oil.

Simon Thomson, Cairn chief executive, said: “This prospective acreage off the west coast of Ireland in the Porcupine Basin brings further exploration and appraisal potential to Cairn’s frontier Atlantic Margin portfolio.”

Mr O’Reilly said: “The arrival of a major independent operator like Cairn, with their deep-water experience and their technical and financial strengths, provides further validation of the real potential of the Irish offshore.”

Cairn fell 8.7 to 280.6p. Providence Resources slipped 4 to 591p.

Separately, two of Britain’s Big Six energy suppliers are preparing for a bidding war to snap up new customers in Ireland through the estimated €1bn (£845m) sale of Bord Gáis Energy.

Centrica and SSE have both said they are interested in the company, which is being offloaded by the Irish government.

Bord Gáis Energy has about 775,000 customers in the Irish Republic and 50,000 in Northern Ireland, as well as a gas-fired power plant and a series of wind farms. It aims to generate earnings before interest, taxation, depreciation and amortisation of €160m by 2015.

An information memorandum is being sent to potential bidders this week after the sale process formally kicked off on Friday, with a sale targeted by the end of the year.