The Irish government's belief that it has drawn a line under its banking crisis will be tested this week when a dissident Irish Life and Permanent shareholder attempts to overturn the bancassurer's recapitalisation and effective nationalisation.

Dublin used sweeping new bank laws to inject 2.7 billion euros (2.26 billion pounds) into IL&P in July after shareholders originally voted down its plans to take a 99 percent plus stake and help fill a 4 billion euro capital requirement that emerged in the aftermath of an EU-IMF bailout.

Piotr Skoczylas, a fund manager who led the shareholder revolt, takes his battle with the state to the courts on Tuesday in a move he says could have repercussions for the government's much-lauded 63 billion euro sector-wide recapitalisation.

I feel and truly believe that the government stole my money and I have pretty much spent the last year trying to defend and protect my property rights, Skoczylas, managing director of Malta-based, IL&P shareholder Scotchstone Capital, told Reuters in a telephone interview on Monday.

It is probably an understatement to say that I am determined.

Skoczylas, a former investment banker at Morgan Stanley, has become a thorn in the government's side over its plans to split IL&P's struggling banking arm, permanent tsb, from its life insurance arm, the proposed sale of which had to be shelved late last year after market turmoil put off prospective buyers.

While acknowledging permanent tsb's high proportion of loss-making tracker residential mortgages as a problem, the Polish-born banker opposes the split and sale of the cash-rich insurance business, instead proposing that the bancassurer be given a time to find private equity investment.

Bank of Ireland is the only domestic lender to attract investment from someone other than the state yet the 1.1 billion euro stake it offloaded to North American investors represents just a tiny fraction of the 85 billion euros capital hole in the sector mostly filled using taxpayer funds.

The future of permanent tsb is currently being debated by Dublin and its EU/IMF lenders and the government sees its resolution as the final piece of its banking plan.

Skoczylas says an investment of 1 billion euros would provide the group with a sufficient buffer, a figure strikingly short of the 3.3 billion shortfall Ireland's central bank said would arise from future losses and the cost of deleveraging almost half of the bank's 37 billion euro loan book.

I'm not trying to paint a rosy picture that there is nothing to worry about, there is a lot to worry about, said Skoczylas, who was also elected as a director to the board of IL&P in July.

(However) we are nowhere close to the Armageddon situation that was described ... Losses on the sale of loan books was the main driver for 4 billion recapitalisation. It appears they will now be able to be sold at lower discounts, incurring much, much lower losses.

POINT OF NO RETURN

Skoczylas, who is one of three shareholders opposing the July High Court order, must prove this week that he submitted his challenge in time before being able to move to a substantive hearing in which he says he will detail breaches of Irish and EU law, as well as abuses of power by Ireland's finance minister.

Should he succeed in proving that the law used to swoop on IL&P is unconstitutional - a tall order given he cannot afford to hire a lawyer for the case - Skoczylas says it could deliver a hammer blow to the government's banking strategy.

The whole recapitalisation of the banking sector in Ireland since (the new bank law) was passed in December 2010 would be in question. This would trigger a real financial crisis in Ireland, he said.

He does not believe the government will let the challenge go that far and instead sees Dublin improving the terms of the 6 cents a share offer it made when injecting the fresh capital six months ago.

We are perhaps at the point of no return. I'm not sure if it would be appropriate to step back, he said, urging that acceptance of such an offer could not be taken for granted.

(Reporting by Padraic Halpin; Editing by David Cowell)