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Webster 1913 Edition

adv.

[From

Merrily; showily. See

adv.

[from gay, and better written gayly.]

Splendidly; with finery or showiness.

Joyfully; merrily.

gaily ‎(comparative more gaily, superlative most gaily)

Merrily.
Showily.
- 1963, Margery Allingham, chapter 7, in The China Governess:
  The highway to the East Coast which ran through the borough of Ebbfield had always been a main road and even now, despite the vast garages, the pylons and the gaily painted factory glasshouses which had sprung up beside it, there still remained an occasional trace of past cultures.

Gaily is not used in reference to the "homosexual man" definition of gay, for which gayly is a rare but attested usage.

merrily