UPDATE 2-Fitch cuts Irish rating again on bank burden

* Cuts rating two notches to "AA-" from "AA+"

* Follows initial cut in April

* Euro trims gains after move, Irish bonds suffer

* Irish econ indicators start improving, Oct jobless fall

(Recasts, adds fresh analyst comment)

DUBLIN, Nov 4 (Reuters) - Fitch on Wednesday cut Ireland's credit rating by two notches, citing threats from its 54-billion euro "bad bank" gamble in the midst of an exceptionally severe recession, giving marks for efforts to clean up public finances.

The euro retreated from earlier gains after the cut -- the second in just over six months after a cut in April -- reduced Ireland's sovereign rating to 'AA-' from 'AA+', skipping the 'AA' rating.

But Fitch put the outlook for the rating going forward on stable due to Dublin's measures to solve its problems -- in a nod to Prime Minister Brian Cowen's determination to cut spending despite opposition from unions. [ID:nL367557]

"The government has promised to pursue tough measures and if (it) doesn't do this than there is the risk of further downgrades," Bloxham Chief Economist Alan McQuaid said of the upcoming Dec. 9 budget for 2010.

The euro trimmed gains against the dollar and the yen while the spread between Irish and euro zone government bond yields widened on the Fitch move.

Despite the fiscal reform efforts, Fitch said Ireland's much steeper recession than in most developed countries and the debt burden associated with the National Asset Management Agency (NAMA), the bad bank, contributed to its rating change.

"The agency notes the vigour of the government's fiscal consolidation response to date, the expectation of further aggressive budget tightening and the likely success of NAMA in rehabilitating the banking sector," it said.

"All these factors have helped stabilise the outlook for Ireland's creditworthiness."

MARKETS BOTHERED

The euro briefly fell to around $1.4740 from around $1.4765 before the announcement. By 1311 GMT, it had pulled back to around $1.4750, and traded 0.2 percent higher on the day.

The 10-year Irish government bond yield rose, widening the spread against euro zone benchmark German Bunds by 2 basis points to 148 basis points after the Fitch news, which came shortly after Bank of Ireland (Dublin: BIR.IR - news) said it could need another state bailout. [ID:nL466228]

Five-year Credit Default Swaps, which price the cost of insuring Irish bonds, widened to 144.7 basis points from 142.4 basis points, monitor CMA DataVision said.

Although NAMA's debt is likely to be accounted outside the government's balance sheet, Fitch said it would still make gross government debt more than quadruple to 110 percent of gross domestic product by the end of 2010 from 25 percent in 2007.

"The positive thing that you can take from this is that they kept the outlook stable which is probably more important," Goodbody analyst Dermot O'Leary said.

Fellow ratings firm Moody's stripped Ireland of its top "AAA (Xetra: 722800 - news) " rating in July and Standard & Poor's has already cut by two notches. Fitch's first cut was in April after the end of a construction-fuelled boom blew a hole in Dublin's tax receipts.

"This downgrade is maybe the last after a series of downgrades if the government sticks to its policy," O'Leary said.

Earlier on Wednesday, the Organisation for Economic Co-Operation and Development (OECD) gave its backing to the NAMA plan, urging Dublin to cut spending boldly, including in politically sensitive areas such as education and health. [ID:nDUB003089]

Several Irish economic indicators have begun to signal a way out of recession, with Wednesday's jobless figures for October showing a monthly drop for the first time since 2007. The government still thinks however that recession could last until 2011. [ID:DUB003092] [ID:nWLA7288]

(Additional reporting by Padraic Halpin; Editing by Ron Askew/Victoria Main)