S&P cuts AIB; downgrades Irish banks' sub debt

* Puts AIB's rating on negative outlook

* Downgrades all Irish banks' Tier 2 subordinated debt

* Investor confusion over government plans for bondholders

(Adds more detail)

DUBLIN, Oct 8 (Reuters) - Standard & Poor's (S&P) cut Allied Irish Banks' (AIB) (ALBK.I) credit rating to BBB+, three notches above junk, on Friday and warned it could be lowered again as Ireland's once largest bank relies on the state to survive.

S&P also cut its ratings on all Irish bank lower Tier 2 subordinated debt to junk due to a higher risk of default after the government said it would renegotiate subordinated debt in nationalised lender Anglo Irish Bank [ANGIB.UL] and building society Irish Nationwide [IRNBS.UL] to help cover their losses.

S&P said Dublin's decision to force losses onto subordinated bondholders in Anglo Irish and Nationwide meant that Allied Irish Banks, Bank of Ireland (BKIR.I) and Irish Life & Permanent (IPM.I) all now face a risk that their lower Tier 2 debt will be restructured.

"This indicates to us that there has been a structural shift in Ireland in the position of lower Tier 2 debt relative to senior issues," the agency said in a statement.

Ireland's government is making subordinated bondholders in Anglo Irish and Irish Nationwide pay part of a bill that could top 50 billion euros ($69.48 billion) to clean up years of reckless lending by its banks.

The financial regulator Matthew Elderfield stoked concern about the country's attitude to senior debt on Wednesday when he said the government could seek a voluntary renegotiation of senior bond debt owed by Anglo Irish and Irish Nationwide. [ID:nLDE695108]

To reassure investors, the country's debt management agency issued a statement on Thursday saying the government did not plan on reneging on agreements with holders of senior debt issued by any of its banks.

The National Treasury Management Agency also said that any reorganisation of riskier subordinated debt would only apply to institutions which are not listed on a recognised stock exchange, in 100 percent state control, and could not survive in the absence of total state support.

But there are concerns that, in particular, if Allied Irish Banks' financial situation worsened the government would make subordinated bondholders share some of the losses.

Reflecting these concerns, rival rating agency Fitch downgraded AIB's lower Tier 2 subordinated debt to sub-investment grade last week. [ID:nLDE69027W]

Ireland's government will take a majority stake in AIB, possibly as much as 90 percent, to help it plug a 10.4 billion euro capital hole.

S&P cut AIB's rating to BBB+ from A- and put its outlook on negative due to its likely continued reliance on government and ECB support, uncertainty over its disposal plans, and risks to a recovery in the bank's earnings.

S&P downgraded AIB's lower Tier 2 debt rating to BB, junk status, from BBB+.

Bank of Ireland's lower Tier 2 was cut to BB+ and Irish Life & Permanent's to BB. (Reporting by Carmel Crimmins; Editing by Sharon Lindores) ($1=.7196 Euro)