Ireland told to keep Irish Water utility on govt books

* Fin min says Ireland (Other OTC: IRLD - news) will still easily beat budget targets

* Latest political blow after mass protest, non-payment

* Opponents say resistance will strengthen ahead of election (Adds analyst quotes)

By Padraic Halpin

DUBLIN, July 28 (Reuters) - European Union authorities have told Ireland that the new Irish Water utility must be counted as part of government finances, a political blow to the government as it faces protests over the levying of direct charges for water.

The government had sought to separate the utility from its balance sheet but the EU statistics agency Eurostat ruled that it must remain on it, Finance Minister Michael Noonan said on Tuesday.

"Of course the government would prefer it if wasn't on the balance sheet and it would get a good political announcement," he told a news conference.

"The pressures that were there to go off balance sheet a year and a half ago are not as strong now. Because budget figures have been much better than anticipated, that has given us additional leeway."

Noonan added that: "There is no crisis".

But many Irish customers have refused to pay their bills and huge demonstrations have taken place in protest against the introduction of direct charges for water for the first time - the biggest resistance to austerity measures since Ireland's financial crisis started in 2008.

Ireland's ruling coalition, which is pinning its re-election hopes next year on its economic record, had hoped to put an end to the political damage wrought by the water charge protests by cutting the level of charges last year.

With its economy growing faster than any other in Europe, Ireland will comfortably cut its budget deficit below an EU-set limit of 3 percent of gross domestic product this year. Noonan said it could also beat its own forecast of 2.3 percent.

However, keeping the investment off the books would have cut the deficit to 2 percent of annual output in 2015 and had an impact every year out until 2020 - providing the government with a buffer in its requirement to eliminate the deficit by 2018.

It would also have cut 600 million euros off Ireland's 208 billion euro public debt, although Noonan said he expected that during the next government's term, Irish Water would generate enough commerical revenues to be allowed to move off balance sheet like other national utilities.

Opponents from all political parties used the controversy to call on the government to scrap Irish Water, while protestors said the boycott campaign would be strengthened.

"The government will be able to point to other examples of economic competence, not least the fact that the economy is in a far better place than it was five years ago, but it does hurt the narrative," said David Farrell, professor of politics at University College Dublin.

"There's no doubt that this is really damaging." (Editing by Kate Holton and Angus MacSwan)