Ireland's banks are unlikely to be able to issue significant amounts of debt outside of a government guarantee scheme until market conditions in Europe improve, Finance Minister Michael Noonan said on Thursday.

Europe's debt crisis has spread rapidly to the core of the union with banks struggling with a credit squeeze and a capital shortfall and the looming threat of a return to recession.

It is likely that international, especially EU, market conditions will have to improve substantially before the issue of Irish bank unguaranteed paper can become significant, Noonan told parliament.

Ireland's government is extending its guarantee of bank deposits and certain liabilities up to a maximum maturity of five years by one year to the end of 2012. Noonan said he expected the European Commission (EC) to formally approve the extension in a few days.

In an information note, Ireland's ministry of finance said given the turmoil in European financial markets it was impossible to forecast when the scheme would end.

The EC extended rules on Thursday allowing EU governments to bail out troubled banks until market conditions improve.

Some 100 billion euros (85.9 billion pounds) in liabilities are covered by the Irish guarantee, which applies to Bank of Ireland , Allied Irish Banks , Irish Life & Permanent and IBRC, formerly Anglo Irish Bank.

Ireland initially issued a blanket guarantee of all bank liabilities with a value of up to 375 billion euros in September 2008, tying the state's fate to its financial sector and setting the stage for an EU-IMF bailout last year.

Under new EC rules, valid from next year, the fees paid by banks for guarantees on their liabilities will reflect their intrinsic risk rather than the country's risk or market conditions.

Irish banks have paid about 1.8 billion euros in fees to the government and under the EC rules there will be a small decrease initially in the fees on debt with a maturity of over one year. The EC's fee structure for debt of less than one year will be unchanged.

(Reporting by Carmel Crimmins; Editing by David Holmes)