Bank of Ireland won EU regulatory approval on Tuesday for drastically shrinking its operations and wholesale funding activities, which was mandated by the European Commission after the Irish authorities took part in its recapitalisation.

The bank's exit from risky portfolios and the adoption of more prudent risk management practices will help restore its viability, the EU executive said in a statement.

Bank of Ireland has embarked on an ambitious plan to downsize and refocus its activities to better serve the Irish economy, EU Competition Commissioner Joaquin Almunia said.

Under the restructuring plan, the bank will substantially deleverage its balance sheet to reduce its dependency on wholesale funding and will focus on balanced-risk lending in Ireland and Britain.

It will also offer certain services to new players or to small banks already active in Ireland in order to reduce the cost for competitors. The Irish government holds a 15 percent stake in Bank of Ireland.

The Commission said Irish authorities also pledged to open up the financial market to boost competition and implement measures allowing customers to switch banks more easily and better compare prices.

Bank of Ireland was ordered in March to raise an additional 4.2 billion euros (3.5 billion pounds) in core Tier 1 capital to shield its balance sheet against future property-related losses following tough, new stress tests.

(Reporting by Foo Yun Chee; editing by Rex Merrifield)