UPDATE 3-Irish economy plunges deeper into recession in Q4

* Q4 GDP shrinks 7.5 percent year-on-year

* Contraction exceeds even most pessimistic forecasts

* 2008 GDP performance the worst on record

* Feb house prices down 9.7 pct yr/yr, 24th month of decline

(Adds minister's comment, house price data)

By Carmel Crimmins

DUBLIN, March 26 (Reuters) - Ireland's economy plunged deeper into recession in the final quarter of 2008 with the worst full-year performance on record, leaving the government with even fewer options for cleaning up public finances.

Gross domestic product (GDP) fell 7.5 percent from a year ago, far worse than even the most pessimistic forecast in a Reuters poll, putting more pressure on Prime Minister Brian Cowen as he seeks to convince European partners, investors and the Irish people that he can steer the former "Celtic Tiger" economy back to health.

"There is no hope of sorting out our budgetary position by 2013 without economic growth, and we are a long way off that at the moment," said Alan McQuaid, chief economist at Bloxham Stockbrokers.

"As things currently stand, it is not hard to see double digit declines in real GDP over the coming quarters."

GDP fell 2.3 percent for the whole of 2008, data from the Central Statistics Office showed on Thursday -- far below the 1.5 percent decline forecast in a Reuters poll and the weakest level since records began in 1947 as consumers and industry put the brakes down hard on spending and investment.

Economists had forecast fourth quarter GDP would drop by 2.9 percent from a year ago. The lowest estimate in the Reuters poll was for a fall of 6.1 percent.

"We have now moved into 2009 with even stronger headwinds than we thought," said Dan McLaughlin of Bank of Ireland.

The 10-year Irish/German bond yield spread showed little reaction to the data, trading around 232 basis points after it was released, 1 basis point wider.

"It is a little bit surprising there wasn't more of a reaction to it," said Sean Maloney, rate strategist at Nomura in London.

"But at the same time, we saw some well received (bond) auctions out of Ireland earlier in the week and given the massive blow out in spreads that we've seen beforehand, perhaps that's just instilled an element of confidence back into the market that a lot of the bad news is completely priced in already."

Gross National Product (GNP) fell 6.7 percent in the fourth quarter from a year ago, worse than expectations for a 3.9 percent drop.

GNP is the government's favoured measure of the domestic economy because it excludes profits earned by multinational companies which have a big presence in Ireland.

NEW TAX SYSTEM

The government has downgraded its forecast for this year's GDP contraction to 6.5 percent from 4.5 percent, which was already predicted to be the worst recession on record due to a global recession and a prolonged property market collapse.

The rapidly deteriorating economy has prompted a meltdown in public finances with Dublin scrambling to keep its budget deficit at 9.5 percent of GDP, the worst in the euro zone, and get its shortfall below the EU's 3 percent limit by 2013.

Finance Minister Brian Lenihan said on Thursday that the national tax take could drop 20 percent this year. [ID:nWLA0782]

The government will attempt to shave at least 4.5 billion euros off the deficit when it unveils new fiscal measures on April 7, in its second emergency budget in six months.

Cowen told reporters on Thursday there would be a strong emphasis on broadening Ireland's tax base, which was heavily reliant on the property market during the boom years.

Data on Thursday showed Irish house prices fell for the 24th month in a row in February, bringing the total decline versus a year earlier to 9.7 percent.

Some economists have said the emphasis should be on spending cuts rather than tax hikes as consumers and businesses struggle to meet previous tax increases.

"We are endeavouring to ... ensure that whatever we do we don't completely crucify the economy," Justice Minister Dermot Ahern said after the publication of the GDP figures. (Additional reporting by Jonathan Saul, Andras Gergely and Padraic Halpin in Dublin and Ian Chua in London, editing by Andy Bruce)