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DUBLIN (Reuters) � Standard & Poor's warned on Tuesday it may cut Ireland's credit rating again due to the rising cost of recapitalizing nationalized Anglo Irish Bank, pushing Dublin's borrowing costs to fresh peaks.

Ireland is battling to convince investors it can afford to prop up its ailing banking sector and cut the biggest budget deficit in the European Union in the face of a faltering economy and growing risks of a political crisis.

So far it appears to be losing the argument.

Coming a day after credit agency peer Moody's slashed its ratings on Anglo Irish's lower-grade debt, S&P's fresh warning sent Irish credit spreads to new highs and the cost of insuring Irish debt from default hit a new peak.

The news also drove other euro zone peripheral spreads higher.

Ireland's rising borrowing costs are unsustainable over the medium term and are putting mounting pressure on Prime Minister Brian Cowen as he heads into a new parliamentary term on Wednesday, with his coalition and deficit-cutting mandate looking shaky.

The 25 billion euros of aid so far earmarked for Anglo Irish would already push Ireland's 2010 budget deficit to around 25 percent of gross domestic product, compared with an EU limit of 3 percent that Dublin aims to reach by 2014.

In August, S&P cut Ireland's long-term rating by one notch to 'AA-' on fears of a substantially higher bill for supporting the banking sector and assigned a negative outlook, meaning another cut was likely over the next one or two years.

On Tuesday, an S&P analyst said the agency's estimate Ireland would have to pour 35 billion euros into Anglo Irish looked increasingly realistic and any amount beyond that could trigger rating downgrades.

"Estimates which were previously strongly against our 35 billion now seem to be becoming more in line with that level of recapitalization cost," S&P analyst Trevor Cullinan told state broadcaster RTE.

"The government's plan B with Anglo means that this 35 billion could even be exceeded. If that were to be the case, then potentially there would be further downward rating actions."

SENIOR DEBT PLEDGE

The premium investors demand to hold 10-year Irish government bonds rather than euro zone benchmark German Bunds

widened by five basis points on Monday to hit a euro lifetime high at 456 bps.

The government is expected to announce later this week its estimates for the cost of winding down the bank via a two-way split into a "funding bank" and an "asset recovery bank."

Ratings agency Moody's downgraded Anglo Irish's unsecured senior debt on Monday, citing a small residual risk the government might not support this debt.

A finance ministry spokesman said on Tuesday Ireland will honor its obligations to senior bondholders.

The Irish Independent newspaper reported subordinated debt holders faced a discounted buyback and put the final cost of state aid to the bank at around 30 billion euros.

"Subordinated debt management exercises have been a key feature of Irish bank restructuring in 2009 and 2010, with Allied Irish Banks, Bank of Ireland, Anglo Irish, EBS Building Society and Irish Nationwide Building Society all engaging in debt buybacks and/or debt swaps," Davy analyst Emer Lang said in a note.

"Hence a further debt management exercise in relation to Anglo's remaining subordinated debt (total 2.4 billion euros) looks likely," Lang added.

(Editing by Patrick Graham, John Stonestreet)

TOKYO (Reuters) � Japan's Takefuji Corp (8564.T) will file for bankruptcy on Tuesday owing $5.2 billion, sources said, making it the biggest consumer lender to fail since courts ordered them to repay borrowers for excessive interest charges.

Takefuji, which has been considered at risk of failing as it lacks the financial backing of a big Japanese bank, will ask the courts to protect it from creditors, two sources close to the matter told Reuters on condition they were not identified.

Takefuji and other consumer lenders have struggled to survive after the Japanese courts ruled in 2006 that they had charged too much interest and had to repay borrowers. A recent government cap on interest rates has further hobbled the industry.

The ruling on interest repayments has already claimed several smaller casualties among consumer lenders. The fear now for Takefuji's rivals is that its failure will spark a run of claims by their borrowers worried that they will not get the refund the court ruling promised.

Analysts said Takefuji's problems posed little wider threat to the overall system, however, because depositor's funds were not at risk.

"Takefuji has raised most of its capital in bonds, which are largely held by foreign investors, mostly hedge funds, so the bankruptcy would not have a big impact on the financial system," Deutsche Securities credit analyst Junichi Shimizu said.

UNDER PRESSURE

A Takefuji spokesman declined to comment. The company on Monday said that it had not decided to file for bankruptcy.

Shares of Takefuji, which have fallen about 56 percent this year, did not trade for a second day on Tuesday on a glut of sell orders. The Tokyo Stock Exchange, which suspended trade of the consumer lender's shares for most of Monday, placed it on watch for potential delisting, citing the possibility of it failing.

Shares in rivals slipped further after sharp falls on Monday.

Acom Co (8572.T), 37 percent owned by Mitsubishi UFJ Financial Group (8306.T) and considered the strongest among Japan's top four consumer lenders, fell 1.3 percent. Unaffiliated Aiful Corp (8515.T) slid 3.3 percent, while Promise (8574.T), 20 percent owned by Sumitomo Mitsui Financial Group (8316.T), declined 0.9 percent.

Shinsei Bank (8303.T), Japan's first foreign-owned lender, operates two consumer finance units under the brands Aplus and Lake, which, unlike its competitors, it funds with deposits.

By affiliating with banks, consumer lenders have secured a steady funding source, according to Takehito Yamanaka, senior analyst at MF Global FXA Securities

"Takefuji did not have the money to make new loans, but others are not in such a situation," he said.

BONANZA OVER

Consumer finance companies emerged as big lenders in the 1990s as Japan's economy tanked and commercial banks reined in credit. Able to borrow at very low rates, they charged interest of nearly 30 percent, allowing them to absorb high default rates on uncollateralized loans. Reimbursements and the state intervention ended the bonanza.

"Lenders may need to boost their reserves and impairment of their capital as a result of any increases in demands for interest refunds," said Deutsche Securities' Shimizu.

"Aiful has a relatively thin equity capital cushion compared with Acom and Promise. Promise is weaker than Acom but the market has seen that SMFG could help the firm raise funds," he added.

Late last year, Aiful staved off bankruptcy by convincing its creditors to defer about 280 billion yen in bank loan principal payments.

Starting as a small money lender in 1966, Takefuji grew to become Japan's biggest consumer finance company. Its founder Yasuo Takei was ranked by Forbes as Japan's second-richest person in 2005, worth $5.6 billion.

But a series of scandals over heavy-handed debt collection and a conviction for Takei in 2004 for ordering wiretaps on journalists, marked the beginning of a state crackdown on a business seen by industry critics as little better than loan sharking. Takei died in 2006.

Japan's consumer finance squeeze culminated this year with a state-engineered credit crunch. In June, the government capped interest rates at 20 percent, down from 29.2 percent, and limited the amount individuals can borrow to one-third of their income.

Japan's banking minister Shozaburo Jimi said on Tuesday his government would study the impact that interest reimbursements were having on consumer lenders, but didn't comment on whether that could mean a relaxing of regulations.

Takefuji had 433.6 billion yen ($5.2 billion) in liabilities as of the end of June, research firm Tokyo Shoko Research said, including about 135 billion yen in bonds.

(Reporting by Taro Fuse, Taiga Uranaka, Noriyuki Hirata and Nobuhiro Kubo; Writing by Tim Kelly; Editing by Edmund Klamann and Lincoln Feast)