DUBLIN (Reuters) - Ireland, warning its recession-weary people to prepare for more austerity, revealed yesterday a mammoth worst-case price tag of over 50 billion euros ($68 billion) to clean up its banks.

Finance Minister Brian Lenihan, estimating it could cost the state up to 34 billion euros just to wind down stricken Anglo Irish Bank, insisted loss projections would not rise further and that the government had entered the final phase of working out a plan to deal with banks' bad property loans.

"We have to bring closure to this estimate matter and that is what we have done today," Lenihan said. "Of course these figures are horrendous but they can be managed over a 10-year period."

The reaction in financial markets, which had been prepared for the huge cost estimate, was modestly positive. The premium which investors demand to hold Irish 10-year debt over benchmark German bunds narrowed nine basis points to 457 bps, after hitting a euro lifetime high of 475 bps earlier this week. The cost of insuring Irish debt against default also fell.

"What they are doing is really giving us the bad news upfront. I think the market needs to know, and here it is," said Padhraic Garvey, interest rate strategist at ING. "It certainly gives them breathing space.

"It's a pretty astonishing deficit number, it's higher than the national debt a few years ago which is an incredible situation to be in."

Lenihan said Ireland was cancelling its bond auctions for the rest of this year, a decision which helped to reassure the markets by suggesting the country still had ample cash reserves, and was therefore not close to seeking an international bailout.

But officials said the clean-up costs revealed yesterday would condemn Ireland to fresh fiscal pain. In an effort to recover the confidence of debt markets, Dublin is committed to cutting the ratio of its budget deficit to gross domestic product below three percent by 2014.

"The additional budgetary costs — and in particular the higher debt-to-GDP ratio that is implied — confirm the need for a reprogramming of the budgetary profile," Central Bank Governor Patrick Honohan said.

The fresh austerity will be politically difficult. Prime Minister Brian Cowen's government has a wafer-thin majority in parliament and faces a discontented electorate, which may make it difficult to push through the 2011 budget in December.

Cowen said on Wednesday he would call three by-elections in the first quarter of next year, and most analysts expect these polls will wipe out his majority and trigger a general election.

Ireland's deficit to GDP ratio will this year blow out to 32 percent, more than 10 times the European Union limit and by far the worst in the union, official figures showed yesterday. Last year, the deficit was 11.7 percent of GDP. Under Lenihan's plan, Dublin will pour 29.3 billion euros into Anglo Irish, which was seen as the posterboy of Ireland's "Celtic Tiger" boom just a few years ago. That could rise to 34 billion euros in the government's worst-case scenario, broadly matching an earlier estimate by credit rating agency Standard & Poor's.

Irish Nationwide, another struggling bank, will need an extra 2.7 billion euros from the state on top of 2.7 billion euros already earmarked, the government said. Lenihan has said subordinated bondholders in both Anglo Irish and Irish Nationwide will take a hit on their investments.

In a surprise move, Lenihan said the government would take a majority stake in Allied Irish Banks, which now needs an additional 3 billion euros in capital on top of an existing requirement of 7.4 billion.

Capital injections into other institutions including EBS Building Society and Bank of Ireland — some of the injections already completed and some seen as possible in future — push the potential bill above 50 billion euros.

Rating agency Fitch said Ireland's AA- rating was still under threat, but added that Lenihan's measures had bought Dublin time to work out out a four-year fiscal plan. The government said it would announce this plan in November.