Ireland's government came under fire on Wednesday for its decision to pay back $1 billion (624 million pound) to holders of bonds issued by the defunct Anglo Irish Bank at the insistence of the European Central Bank.

The government confirmed it would pay back the senior unsecured bonds due on Wednesday at par despite the fact that the institution, recently renamed Irish Bank Resolution Corporation (IBRC), is being wound down after swallowing 29 billion euros (24 billion pounds) of state capital.

It's a galling day for Ireland. It's a galling day for the Cabinet too, said Agriculture Minister Simon Coveney. But the alternative is worse for the country in terms of reputation.

The centre-right Fine Gael party secured a landslide victory in February after promising to impose haircuts on bondholders in Irish banks.

It has imposed losses on junior bondholders across the Irish banking sector, but the European Central Bank, part of a troika of international lenders that gave Ireland 67.5 billion euros in emergency loans, made clear it would not allow Ireland to impose a haircut on senior bonds for fear of the contagion risk.

The government backed down in the face of ECB opposition and has said it will instead try to negotiate a cheaper interest rate and longer repayment term on the promissory notes, a sort of IOU, used to finance the bulk of Anglo's bailout.

Including interest, the cost of shoring up Anglo and the much smaller Irish Nationwide Building Society will be around 47 billion euros, including an interest bill of around 17 billion euros.

You made a solemn promise of not a red cent more, said Michael Martin, the leader of the largest opposition party Fianna Fail said to Kenny during a parliamentary debate on Wednesday. Your words mean nothing here.

Independent member of parliament Richard Boyd Barret, who was to hold a demonstration outside parliament on Wednesday, described the move as an act of gross political and economic treason.

Kenny said Ireland was not obliged to pay the bondholders under its bailout deal with the ECB, International Monetary Fund and European Commission, but that the ECB had refused to give its consent.

Failing to pay could call into question around 150 billion euros of liquidity assistance to Irish banks from the ECB and a deal to cut a cut in the interest rate payable under the IMF/EU deal by a cumulative 10 billion euros, Kenny said.

I don't like the situation and it is not fair that we are in a situation here where we are not in a position to unravel obligations to foreign bondholders, he said.

But this country has always paid its way and always paid its debts, he said.

Criticism of the planned Anglo bond repayment was overshadowed in news bulletins on Tuesday by the arrest of the former finance director of Anglo Irish Bank, William McAteer, as part of a long-running investigation. He was later released without charge.

The government on Wednesday also announced that it had discovered its debt was 3.6 billion euros less than previously thought due to an accounting error.

(Reporting by Conor Humphries)