UPDATE 4-Ireland guarantees all bank deposits

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By Andras Gergely and Kevin Smith

DUBLIN, Sept 30 (Reuters) - Ireland guaranteed all bank deposits on Tuesday in a bid to improve the industry's access to international funds frozen by the global credit crunch.

The pledge, which covers up to 400 billion euros ($575 billion) of liabilities, is more than twice the country's annual gross domestic product. The guarantee includes retail, commercial and interbank deposits, taking effect immediately and expiring in September 2010.

The scheme, which also covers certain bonds and other debt instruments, will be provided at a charge to the banks at a level still to be determined.

Ireland, hit by the double whammy of the global credit crunch and a domestic property slump, last week became the first euro zone economy to slide into recession this year, abruptly ending more than a decade of its 'Celtic Tiger' boom.

"What we're doing here is guaranteeing the lifeblood of the banking system, the system of lending and borrowing that is essential to successful operation of any banking system," Finance Minister Brian Lenihan said.

"Were liquidity to dry up in the Irish banking system in the weeks ahead the inevitable result would be economic catastrophe for this country."

He said the guarantee needed to be enshrined in legislation and might not apply were a foreign bank to take over an Irish bank.

Shares in the country's banks have been some of Europe's hardest hit. On Monday, they suffered their biggest losses in more than two decades although Tuesday's announcement helped to reverse much of those falls.

Shares in Anglo Irish Bank ANGL.L were 59 percent higher by 1331 GMT at 3.6 euros. Allied Irish Banks (ALBK.I) traded 13.8 percent higher, with Irish Life and Permanent (IPM.I) up 23.5 percent and Bank of Ireland (BKIR.I) 19.9 percent stronger.

That helped the Irish market .ISEQ climb more than 6 percent on a day when world stocks fell to near three-year lows as turmoil following the rejection of a $700 billion U.S. bank rescue package swept from Wall Street to Asia and Europe.

"This should make it easier for Irish banks to obtain funding," said ING credit strategist Maureen Schuller, adding it was a solution other countries should consider.

EXPOSED TO PROPERTY

The Irish Finance Ministry said its scheme could cover up to 400 billion euros in liabilities. That is more than twice Ireland's gross domestic product of about 190 billion euros and a national debt of around 45 billion, Davy stockbrokers analyst Scott Rankin said.

"With the U.S. bailout voted down last night and Dexia also getting a 7 billion euros capital infusion, the Irish government has moved to take out its own bazooka," Rankin said in a note.