Ireland's government signalled on Monday that gradually winding down nationalised Anglo Irish Bank could be an option as political pressure mounts on Prime Minister Brian Cowen to stem the rising cost of maintaining the troubled lender.

Propping up Anglo Irish left Ireland with the biggest budget deficit in the European Union last year and with the costs continuing to climb and no final bill in sight, markets are spooked and the premium investors demand to hold 10-year Irish bonds rather than Bunds neared record highs again on Monday.

Until recently, the government's preference for Anglo has been to split it into a good bank and a bad bank but the Green Party said on Monday it wanted the lender, brought to the brink of collapse by a disastrous binge on property, wound down slowly.

What we are not saying is that there can be an immediate shutdown of Anglo, that is still by far the most expensive option, Green Party Chairman Boyle told public radio RTE.

Any orderly wind-down of a bank will take at least four or five years, said Boyle.

Cowen needs Green Party support to continue in office and tackle the country's deficit woes.

In response to Boyle's comments, the finance ministry said both the good bank-bad bank split and an orderly wind-down remained available options in talks with Brussels.

If the orderly wind-down of Anglo is selected as the most cost-effective option, then obviously the time period for this wind-down would be whatever time period minimised the cost, the ministry said.

Anglo's chief executive said this month he expected the European Commission to agree on a good bank-bad bank split but a newspaper report on Sunday said that plan was facing opposition in Brussels.

If the EC demands Anglo Irish be shut down there is very little Ireland, whose position within the euro zone has prevented an Icelandic-style meltdown, can do to keep it open.

Dublin has consistently argued that keeping Anglo operating was the cheapest option because shutting it could spark a possible flight out of Irish sovereign debt.

But some analysts said a wind-down, if structured properly, might not have such disastrous consequences for Ireland's investor profile as ministers previously argued.

The policy is to ensure that bondholders are repaid their full amount and the bank is kept open, said Dermot O'Leary, chief economist at Goodbody Stockbrokers. And despite that we're seeing spreads on Irish government bond yields at record high levels.

The market may ... be saying that this course of action is unaffordable for the Irish state.

S&P DOWNGRADE

Anglo Irish, taken over last year after exposure to a property market crash and several loan and deposit scandals, is moving half its loan book to Ireland's state bad bank scheme, the National Asset Management Agency (NAMA).

It has proposed to divide its remaining assets into a good and bad bank of its own, with the good unit taking assets worth 10-15 billion euros ($13-$19 billion).

Boyle said the higher-than-expected discount NAMA has demanded on Anglo's loans showed the good bank-bad bank split might also be more costly than originally thought.

Management in Anglo Irish are both trying to cooperate with NAMA and promote this idea of a good bank which I think is dividing their attentions, Boyle said.

Ratings agency Standard & Poor's cut Ireland's credit rating to AA- last week, saying the cost of the Anglo Irish rescue, which it put at 35 billion euros, would be 10 billion more than earmarked by the government.

Boyle said Ireland should cooperate with the European Commission and the European Central Bank to make sure a wind-down of Anglo would not endanger other Irish banks and the ability of Ireland itself to borrow.

(Editing by Carmel Crimmins and Susan Fenton)

($1 = 0.7861 euro)