UPDATE 1-Ireland says Merkel bank recap comments refer to Spain
* Ireland insists decisions of June EU council still stand
* Fin min says to seek clarification on Merkel comments (Adds fin min comments)
DUBLIN Oct 19 (Reuters) - Ireland scrambled on Friday to play down comments from German Chancellor Angela Merkel that banks could not be retrospectively recapitalised via the euro zone's bailout fund, saying she was referring to Spanish lenders.
Merkel raised the new hurdle after a two-day EU summit, appearing to dash hopes in Dublin and Madrid that they could remove some of the cost of past bank rescues that have pushed up already strained national debts.
After Euro zone leaders agreed in June to allow its rescue funds recapitalise banks, Ireland, whose bank rescue cost the equivalent of 40 percent of annual economic output, said it would be able to benefit from the new rules retrospectively as part of ongoing talks to improve the terms of its bank bailout.
"The meeting of the European Council of today and yesterday reaffirmed the commitments made in the euro summit statement of June 29... to enhance Ireland's debt sustainability, and also agree to break the link between bank and sovereign debt. Those commitments stand," a government spokesman said in a statement.
"We understand that Chancellor Merkel was asked a direct question about the recapitalisation of Spanish banks and she replied in that context. We will continue to work with our partners on the implementation of what was agreed in June."
Ireland's finance minister Michael Noonan added that the government would seek to clarify the comments with Berlin later on Friday or on Saturday having previously received different feedback from the German Chancellery.
"We will be clarifying these matters and the next phase now is that the (European Union) finance ministers will work out the criteria and within the criteria will be whether it will be retrospective with respect for Ireland."
As well as seeking to sell stakes in its almost wholly state-owned viable banks to Europe's new rescue fund, Ireland has been in separate talks for almost 18 months to ease the burden placed on it by two failed banks.
Noonan said discussions with the European Central Bank (ECB) were proceeding on that front.
The commitment made in June to examine easing the terms of Ireland's bank bailout has helped push Irish bond yields down significantly, allowing Dublin to borrow on long-term debt markets for the first time since signing an EU/IMF bailout in November 2010. (Reporting by Padraic Halpin; editing by Ron Askew)
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