European Union leaders need to come up with a comprehensive plan for tackling the region's debt crisis if they hold an emergency summit on Friday, the Irish Prime Minister said on Wednesday after Ireland had to swallow its first ever junk credit rating.

Rating agency Moody's downgraded Ireland's on Tuesday and said it was likely to follow Greece in needing a second bailout, a stance that government officials said will make it harder for Dublin to return to funding itself through debt markets next year.

Irish officials are increasingly frustrated at the lack of clarity among euro zone policymakers over how to address Greece's debt problems and the impact this is having on Dublin's own debt sustainability.

There is no point in having a meeting that won't bring about a conclusion in a comprehensive sense to something that is not going to go away unless it is dealt with, Prime Minister Enda Kenny told parliament.

Moody's problem is not with Ireland, Ireland's problem is with Europe.

A market attack on Italy which, if it required assistance, would overwhelm the euro zone's existing rescue funds, looked to have rattled European leaders into action this week but Germany threw plans for a summit into doubt on Wednesday, saying Greece was funded until September so there was no rush.

Portugal, Greece and Ireland are all struggling to generate enough growth to begin the long task of reducing high public debt burdens and end their reliance on emergency funding, but Finance Minister Michael Noonan warned on Wednesday that Dublin faced major challenges in dodging a second bailout.

The challenges we face in returning to a position of economic sovereignty remain considerable, Noonan told a parliamentary committee.

Noonan also signaled that France may again demand Ireland raise its corporate tax rate in return for a cut in the cost of Dublin's European emergency loans, despite euro zone finance ministers agreeing on Monday to cut the cost of borrowings from the region's rescue fund.

Dublin has said it will not raise its company tax rate, a cornerstone of the country's industrial policy, and the issue has so far derailed attempts to get cheaper loans from Europe.

The details and level need to be worked out though and must be agreed by all euro area member states. It is not clear at this stage if, when the details become available, they will be acceptable to all member states, Noonan said.

MARKET ACCESS MORE DIFFICULT

Ireland, like Greece before it, had planned on returning to market funding next year as part of last year's bailout from the European Union and International Monetary Fund, but Irish bond yields jumped to record highs on Wednesday, making it less likely Dublin can fund itself affordably on markets.

The action by Moody's will make it more difficult for Ireland to access the markets next year, Oliver Whelan, director of funding at the National Treasury Management Agency (NTMA), which will lead Ireland's return to markets, told national broadcaster RTE.

Moody's move comes a week after it slashed Portugal to junk status with a similar warning about the need for a second round of rescue funds. It reflects the rating agency's view that any further financial assistance from Brussels will require private investors to share part of the pain, possibly through a debt rollover or swap.

The European Union's executive criticized the downgrade of Ireland on Wednesday, calling it incomprehensible and the timing of the announcement questionable.

Ireland's rating, never before in junk territory, is now at Ba1, one notch below former financial market pariah Colombia and two notches below Brazil. Moody's has also kept a negative outlook, meaning further cuts are likely in the next 12 to 18 months.

Whelan said he thought it was unlikely the private sector would become involved in a second bailout for Ireland.

The fear which Moody's have is that a second bailout would involve private sector (investors) taking a haircut on their holdings of Irish government debt, we think that is quite unlikely, NTMA's Whelan said.

We will be saying to people as we continue to implement the EU/IMF program...it is more and more unlikely that that solution would be imposed on us.

RESISTANCE

European finance ministers have acknowledged for the first time that some form of Greek default may be needed to cut Athens' debts. If that materializes, Ireland's rating could be set for a further round of cuts.

Unlike Greece, Ireland is meeting its bailout targets and Irish officials have felt frustrated at how their efforts have been swept aside by events in Athens. Ireland's debt to GDP ratio is expected to peak at 120 percent in 2013 compared to 157 percent for Greece.

Whelan acknowledged that some investors will be spooked by the downgrade but said he expected Irish bond prices to prove resistant to the move, with Fitch and Standard and Poor's ratings still above junk.

There will most likely be a knee-jerk reaction but arguably a lot of this was already priced in, Glas Securities said in a note on Wednesday. Ireland will remain within all the major bond indices which means that index-matched investors will not be forced to sell.

The cost of insuring Irish debt against default rose on Wednesday, with five-year credit default swaps (CDS) rising to 1,015 basis points, up 22 bps on the day.

(editing by Patrick Graham, John Stonestreet)

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