By Jan Strupczewski and Julien Toyer
BRUSSELS (Reuters) - Ireland said it was discussing stabilization measures with its European partners on Tuesday and ways to cut its heavily indebted banks' funding costs in what a top EU official called a "survival crisis" for the euro zone.
A euro zone source said finance ministers of the 16-nation currency area meeting in Brussels would declare support for Dublin's austerity measures and express readiness to help financially, if it asks for aid, but would not announce any practical measures.
In Dublin, Prime Minister Brian Cowen rebuffed calls to request a bailout, saying the government was fully funded until mid-2011, and insisted that only the banks may need help.
"The cost of money is simply too high," Cowen said in parliament. "What we are doing is discussing with our European partners as to what stabilization (measures are) ... necessary."
Irish banks have grown increasingly reliant on funding from the European Central Bank, as other commercial banks have been reluctant to lend to them following the financial crisis in fellow euro zone member Greece.
European Economic Affairs Commissioner Olli Rehn said the EU executive, the ECB and the International Monetary Fund were all working on ways "to resolve the problems of the Irish banking sector."
Bank of Ireland, the country's largest lender, signaled last week that it had suffered a 10 billion euro outflow of deposits from early August until the end of September. Allied Irish Banks, which will be more than 90 percent owned by the state following a rights issue later this year, will issue a trading statement later this week with details about its funding situation.
The euro fell more than a cent to below $1.3450 and European stocks shed 2.2 percent on the day as investors worried that the meeting would not bring a solution to Ireland's debt crunch.
Senior officials agreed on draft terms of reference on Ireland just before the ministers met, and the text could still change in the course of discussions on Tuesday evening.
FORMAL AUSTERITY PROGRAMME
Some ministers said before the talks that loans from EU emergency funds could only be granted to a government that signed a formal austerity programme with conditions set and enforced by the European Commission and the IMF.
European Council President Herman Van Rompuy, who chairs EU summits, told a Brussels think-tank the future of the 27-nation union was at stake in the latest spasm of a debt crisis that began a year ago with Greece.
"We are in a survival crisis," he told the European Policy Center. "We all have to work together in order to survive with the euro zone because if we don't survive with the euro zone, we will not survive with the European Union."
But Rehn cautioned against alarmism, saying: "It's not a matter of the survival of the euro."
The ECB and some euro zone peers want Dublin to take a quick decision on applying for aid amid signs that market contagion is affecting fellow struggler Portugal and beginning to hurt Spain.
EU sources say possible aid under discussion for Ireland ranges from 45 billion to 90 billion euros ($63-123 billion), depending on whether Dublin needs support for its banks.
In Washington, U.S. Treasury Secretary Timothy Geithner said Europe was capable of dealing with the debt crisis but needed to act "very, very quickly," combining temporary financial support with reforms that resolve underlying problems.
His remarks appeared to reflect U.S. concern that, if left to fester, they could spread and imperil global recovery.
Failure to reach agreement at the talks, which widen to all EU finance ministers on Wednesday, could make markets even more jittery and push borrowing costs still higher for Ireland and other countries on the euro zone's periphery.
CONDITIONS
Eager to save face and protect a slim parliamentary majority, the Irish government has sought support for its banks, which were driven to the brink by the global financial crisis and a property market crash, without a formal state bailout.
The ECB is now channeling around a quarter of its loans to banks in Ireland. Ireland has said the bill for bailing out its banks could top a jaw-dropping 50 billion euros but investors fear the final figure could be worse.
In an indication of the sort of terms Brussels may face pressure to set, a senior German lawmaker said Ireland should raise its ultra-low 12.5 percent corporation tax rate, a magnet for foreign investment, to help cut its debt.
Higher-tax countries have long seen the Irish rate as a form of unfair competition.
Ireland's bond yields have soared in the past two weeks and its state-guaranteed banks are largely shut out of private sector interbank lending and reliant on the ECB for funds.
This has helped push up borrowing costs of other countries on the euro zone's periphery, such as Spain and Portugal. Spanish short-term debt financing costs jumped at an auction of 12- and 18-month treasury bills on Tuesday.
The Irish coalition government has been reluctant to apply a politically embarrassing bailout, partly because it faces a by-election it can ill afford to lose on November 25 and also because it wants to preserve its sovereignty.
SPILLOVER
The risk premium investors charge for holding Irish 10-year bonds rather than benchmark German Bunds widened to 585 basis points and the cost of insuring Irish, Portuguese and Greek debt against default rose up as peripheral euro zone bonds remained under stress ahead of the Brussels meeting.
The ministers were also expected to discuss a future euro zone crisis resolution mechanism, which Germany wants to start from 2013, replacing the 440-billion-euro European Financial Stability Facility set up after Greece sought help.
(Additional reporting by Andreas Rinke in Berlin, Luke Baker in Brussels, Manuel Ruiz and Nigel Davies in Madrid, William James in London, Glenn Somerville and David Lawder in Washington; writing by Paul Taylor; editing by David Stamp)
