WRAPUP 1-Fitch cuts Irish rating, expects aggressive budget

* Fitch cuts rating two notches to "AA-" from "AA+"

* OECD urges bold spending cuts

* Bank shares claw back after Bank of Ireland H1 results

* Monthly jobless figures drop for first time since 2007

DUBLIN, Nov 4 (Reuters) - Fitch cut Ireland's credit rating by two notches on Wednesday, changing its outlook to stable after citing the government's vigorous response to an exceptionally severe recession.

The ratings agency said it expected further aggressive budget tightening and the Organisation for Economic Co-Operation and Development (OECD) separately urged Dublin to cut spending boldly. [ID:nL4144452] [ID:nDUB003089]

Finance Minister Brian Lenihan has consistently said he must cut spending substantially in the Dec. 9 budget for 2010 just to stabilise the budget deficit at 12 percent of gross domestic product, already four times the European Union's limit.

"The rating downgrade underlines the importance of taking appropriate action," Lenihan said in a statement after Fitch cut Ireland's rating by two notches to "AA-".

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 country's 54-billion euro "bad bank", contributed to its rating change.

Fitch said NAMA, which is expected to be passed by parliament on Nov. 12, will likely succeed in rehabilitating the banking sector and the OECD also backed the plan aimed at cleansing banks of their risky commercial property loans.

Slow progress debating the plan had hit bank shares over the last week but Ireland's top two banks clawed back some of those losses after the lack of fresh bad loan surprises from Bank of Ireland reassured investors. [ID:nL466228]

Shares in Bank of Ireland (Dublin: BIR.IR - news) closed up 24.5 percent at 1.75 euro and Allied Irish Banks (Dublin: AIB.IR - news) traded 19.6 percent higher for the day at 1.73 euros in a wider Irish market that rose 3.99 percent.

BUDGET FOCUS

Stressing that fiscal consolidation was necessary for a number of years, the OECD said Ireland should cut spending in politically sensitive areas such as education and health, which are being fiercely defended by trade unions.

As unions prepare for a nationwide protest on Friday and a possible Nov. 24 strike against the planned cutbacks, the OECD said spending on welfare and schools should now reflect the deflationary realities of the post-"Celtic Tiger" boom era.

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. [ID:DUB003092]

The government still thinks however that recession could last until 2011 and analysts reiterated that fiscal action was necessary now to avoid further damage. [ID:nWLA7288]

"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 next month's budget.

The downgrade briefly forced the euro down to around $1.4740 from around $1.4765 before the announcement. By 1715 GMT, it had pulled back to around $1.4832.

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.

Lenihan once again warned that Ireland's budget deficit could grow to as much as 15 percent of GDP next year without 4 billion euros ($6 billion) in savings that he said were backed by international organisations.

"It is extraordinary that the European Commission, the OECD, the IMF all have said there is a clear way out for Ireland and that is that to resolve our banking crisis, address our public finances and restore our competitiveness," Lenihan told a news conference. (Additional reporting by Antonella Ciancio; Editing by Ron Askew)