Ireland is set to reveal up to a 25 billion euro ($35 billion) hole in its banks' capital and a radical restructuring of the sector as it releases stress test results on Thursday in a last ditch bid to calm nervous markets.

The government will also announce plans to fold the EBS building society into the country's second largest lender Allied Irish Banks , the Irish Independent reported, citing government sources.

It said the insurance arm of Irish Life would be sold and the government would create special vehicles to take 80 billion euros off the balance sheets of the four main banks.

But a crucial plan for the European Central Bank to extend a medium-term funding lifeline may be delayed amid legal issues, the paper said.

The government will publish what is meant to be the final bill for propping up the banks at 1530 GMT (11:30 a.m. ET), as it tries to convince investors it can avoid a damaging restructuring that would deepen Europe's debt woes.

An 85 billion euro bailout from the EU and IMF late last year failed to resolve the financial crisis and Dublin's dismal record in putting an end of its banking woes, now in their third year, means skepticism is high.

Analysts will look hard at the details of the tests for signs of whether further losses may yet be in store and whether the new government will follow up on its previous threats to impose losses on creditors holding debt that is not covered by a state guarantee.

The Irish Times reported that Finance Minister Michael Noonan would call for a watershed EU-wide scheme for passing on bank losses to bondholders, without giving details.

Once more we cross our fingers and hope that this will be the defining moment and we will be able to begin to look beyond the current difficulties, said Austin Hughes, chief economist at KBC Bank.

The crucial element is that we get a coherent response on this from government and Europe.

Nationalized Anglo Irish Bank highlighted the scale of the crisis after announcing the largest loss in Irish corporate history on Thursday. It said it lost 17.7 billion euros in 2010, in line with expectations.

The bank has taken 29 billion euros of capital support in the past two years, but no more will be needed, it said.

I don't see any more capital need from the state unless the market tanks, Anglo Chief Executive Mike Aynsley told Reuters.


The euro, which was hurt last week by nerves around the scale of the banks' difficulties, was trading a touch higher, while Irish bond yields edged lower in early trade.

Analysts surveyed by Reuters estimated Ireland's banks, including AIB and Bank of Ireland would need 23 billion euros after the stress tests, well inside the 35 billion euros set aside for banking losses by Dublin under its international bailout.

The Irish Independent cited sources as saying the capital needs would be 20-25 billion and The Irish Times said the figure would be 18-23 billion euros.

Trading in the bank shares was suspended prior to the announcement.

Dublin, however, is also relying on the ECB to give medium-term funding to ease the banks reliance on current short-term emergency money.

An announcement on such a facility, revealed to Reuters by a euro zone central banking source last week, may come after the results of the stress tests.

I hope this (stress test process) will draw a line under the uncertainty and increase confidence in bank balance sheets and specify a robust level of capital requirement. That's a good start, but the funding issues need to be addressed, Anglo's Aynsley said.

Even with a credible banking bill and funding from the ECB, Ireland's Prime Minister Enda Kenny still needs to persuade European partners to cut the cost of their loans to the euro zone struggler and possibly extend the loans' duration to convince investors Ireland can tackle its debt mountain.

(Additional reporting by Steve Slater; Editing by Patrick Graham)