Ireland cut 3.5 billion euros from its hefty 2014 borrowing requirements on Wednesday as part of a campaign to improve its chances of exiting an EU-IMF bailout next year.

In the most significant test of sentiment since exiting bond markets in September 2010, Ireland launched a bond switch to shift part of the 11.8 billion euros January 2014 funding cliff that most analysts say would force it to the EU for extra aid.

Ireland's debt management agency offered holders of its 4 percent January 2014 note a new bond maturing in February 2015 and paying a coupon of 4.5 percent in a show of confidence seen as a shrewd move by market analysts.

The successful switch provided a crumb of comfort for Ireland's government which once again faced scathing criticism inside and outside parliament on Wednesday for repaying further senior debt of failed lender, the former Anglo Irish Bank.

The headline number is very impressive, it's fair to call it a success. This creates a viable route for the NTMA to regain market access and to issue in the primary market, said Owen Callan, a senior dealer at Danske Markets.

It shows the markets have a certain amount of respect for what Ireland is trying to do. They have put Ireland in a very different category from Greece. Ireland is starting to reattach itself to Italy and potentially even Spain going forward.

Ireland's National Treasury Management Agency (NTMA) offered to buy the 2014 paper at a yield of 4.9 percent, broadly in line with where it is trading in the secondary market and sold the 2015 paper at a yield of 5.152 percent.

The yield, which moves in the opposite direction to the price, had dropped on the 2014 paper from 5.4 percent on Tuesday as investors who had shorted the bond moved to cover their positions.

Dealers said foreign investors were put off participating by the relatively low yield on the new bond but that it saw strong demand from Irish banks, which could use the 2015 note as collateral with the European Central Bank.

By all accounts it was dominated by domestic players which is the only thing that would taint the switch, it would have been nice to have more international players involved, said ING strategist Padhraic Garvey.

To make an Irish return to the bond market a viable thing, the international investor base has got to be more involved.

RISING ANGER

Ireland wants to start issuing longer term debt later this year to cover some 20.5 billion euros of borrowing in 2014 needed to repay debt, including January's reduced 8.3 billion euro redemption, and to finance an expected budget deficit of 5 percent of gross domestic product.

Ireland's government is trying to improve the terms of its current bailout, conscious of the political damage of seeking a so-called precautionary programme of additional EU funding should it be unable to fully meet its borrowing needs.

Finance minister Michael Noonan, who described Wednesday's bond switch as the first step in getting back into the market, met the European Central Bank president on Tuesday to try and win approval for a reduction in the cost of Dublin's 63 billion euros bank rescue package.

The slow negotiations, particularly over how to refinance some 30 billion euros worth of IOUs pumped into Anglo, are taking place amid rising anger among the austerity-hit public at the government's decision not to impose losses on some senior bondholders at the bank.

There were small protests outside government buildings and Noonan's office over the paying of 1.25 billion euros to unsecured bondholders on Wednesday and the head of the Catholic church in Dublin also weighed in on the debate, saying the government did not have to heed advice on the repayment.

The government maintains the repayments are part of what has to be done to restore the fiscal reputation of the country and keep international investors on side.

STRONG TAKE-UP

Ireland's success so far in meeting fiscal and banking targets under its bailout has helped cut its borrowing costs on secondary markets and the NTMA said its decision to offer the switch reflected appetite for its short-term paper.

We are very pleased with the strong take-up of this switch offer. This exercise has demonstrated investor appetite for Irish government paper and will support our plans for a phased re-entry to long-term debt markets, the agency said.

The settlement date for Wednesday's switch is February 1 and the NTMA is likely to look at more such exchanges this year, a source familiar with the process told Reuters.

(Additional reporting by Conor Humphries; Editing by Anna Willard)