The cost of bailing out Anglo Irish Bank, the lender at the centre of Ireland's financial crisis, could rise to €34bn (£29.1bn) under a worst case scenario, the Irish central bank admitted today. The news came as the country's finance minister warned that the failure of the nationalised bank would "bring down" Ireland, and warned of further austerity measures.

In an interview with the Financial Times, Brian Lenihan said Ireland had no choice but to act. "Any Anglo failure would bring down the sovereign. It is systemically important not because of any intrinsic merit in the bank, I can assure [you] I don't see any. But because of its size relative to the national balance sheet. No country could contemplate the failure of such an institution," he said.

Under its base case scenario, the central bank said the Anglo Irish bill was expected to be €29.3bn – equivalent to nearly a fifth of the country's national output. Anglo Irish has already received about €23bn to prop it up and is set to be split up into an asset recovery bank and a funding bank.

Lenihan insisted that these were the final figures, adding "this bring the crisis to a closure". "We're quite satisfied that the balance sheets of the banks have been cleaned up and restored and the banks are ready and fit to go back into business," he added.

The bailout will take government debt to over 100% of GDP but the government insists that it will be manageable because it will be spread out over at least a decade.

Although the costs of the bank rescue will increase the Irish deficit to 32% of the Republic's GDP, Lenihan insisted the huge injection of public money was a one-off. The Irish government claims that, unlike Greece this spring, Ireland would not have to go cap in hand to the International Monetary Fund or the European Central Bank to re-finance its national debt.

But the Irish Labour party's spokesperson on finance Joan Burton today described the announcement on the spiralling cost of shoring up Anglo Irish as "Ireland's Black Thursday".

The massive sums of tax payers' money injected into the Irish banking system will inevitably lead to an even more austere budget this December than had been projected. Lenihan said that while the overall level of state support to the banks remained "manageable", there would have to be further "consolidation" of the public finances next year, over and above the targets already announced.

Ratings agency Standard & Poor's (S&P) has warned that if the Anglo Irish bailout tops €35bn it could put the country at risk of a further downgrade on its debt rating. The agency downgraded Anglo Irish's subordinated debt by three notches to triple C yesterday and warned there was a "clear and present risk" of a restructuring of the bonds.

Allied Irish needs €3bn

Allied Irish Banks, another troubled lender, needs to raise an additional €3bn by the end of the year, on top of the already announced €7.4bn, the central bank said. The government will unveil plans to recapitalise the bank, in which it has a near-19% stake, later today. Lenihan said the government was likely to take a majority stake in Allied Irish and that the bank's executive chairman Dan O'Connor and group managing director Colm Doherty would step down before the end of the year.

"Today's announcements take the Irish banking system closer to a final resolution of its restructuring, which is a prerequisite for sustained economic recovery," said Ireland's central bank governor Patrick Honohan.

Lenihan said the National Treasury Management Agency had decided not to proceed with the remaining auctions of Government bonds scheduled for the next two months, but would return to the bond market early next year. "Given the high premiums in bond markets, we didn't believe it was affordable for us to have auctions in October and November, but we'll be back in January," he said.

The decision to transfer billions to the main Irish banks is deeply resented by Ireland's population. The depth of public antipathy towards the banks was evident in Dublin yesterday when a cement mixer was driven into the gates of the country's parliament. The vehicle contained references to Anglo Irish Bank and bankruptcy.

Also today, Moody's downgraded Spain's credit rating by a notch, from Aa1 to Aaa, with a stable outlook. The agency said it was acting because of concerns over Spain's weak growth prospects and considerable deterioration in the government's financial strength.

The other two main credit rating agencies, S&P and Fitch, already downgraded Spanish government debt in the spring.