* Moody's says rating could be cut to mid- to high-AA
* Euro falls, Irish debt spreads widen
(Adds more detail, comment)
By Carmel Crimmins and Padraic Halpin
DUBLIN, April 17 (Reuters) - Moody's warned on Friday it could cut Ireland's AAA credit rating within three months as crises in the public finances and banking sectors prompt a jump in debt levels and cloud the prospects for economic recovery.
Standard & Poor's and Fitch have already downgraded Dublin's sovereign rating and the signal Moody's could follow suit sent the euro falling to a fresh one-month low of $1.3057, compounding investor concerns about the health of some euro zone economies.
Investors also demanded a higher premium to hold Irish debt rather than Bunds.
"Today's rating action reflects the severe economic adjustment taking place in Ireland, which threatens to undermine the country's low tax, financial services-driven economic model," said Dietmar Hornung, Moody's senior analyst.
"Ireland has lost both economic and government financial strength relative to its AAA peers over the past year."
The former "Celtic Tiger" economy could see its historically low debt levels surge to potentially 100 percent-plus of Gross Domestic Product (GDP) next year, from about 41 percent last year, as it tries to cleanse its banking sector of tens of billion of euros in soured property loans.
A deep and protracted housing slump, after years of boom, has exacerbated the impact of a global recession, triggering a blowout in Dublin's budget deficit and raising doubts about the 10-year-old euro bloc's ability to deal with such strains.
Ireland is holding an auction next week to raise up to 1 billion euros via two bonds, and the country's debt management agency said despite Moody's warning it expected to get better prices than at a previous auction in March.
"Certainly yields will be lower than the last time, spreads have narrowed over Germany over the last month and there is plenty of demand out there at the moment not just for Ireland but generally," Anthony Linehan, the National Treasury Management Agency's (NTMA) deputy director of funding and debt management told Reuters in an interview.
"I think risk appetite has come a bit back."
BEHIND THE CURVE
Moody's said it could downgrade Ireland to the mid- to high-Aa rating range, in line with its rivals, if it decided Ireland would emerge from the crisis with relatively weak growth prospects and a much higher debt burden.
Analysts said its warning would not make waves.
"The ratings agencies are behind the curve on this -- Ireland has been effectively trading with an AA credit rating for some time -- so the immediate impact on next week's bond auction will be zero," said Donal O'Mahony, global strategist for Davy Stockbrokers.
"The backdrop to the auction is one of risk appetite revival and the outlook should be reasonably good."
Ireland's rapid deterioration from Europe's economic golden child to regional laggard stunned investors who blew out the cost of protecting Irish government bonds from default to record highs of nearly 260 basis points in January.
Since then, Dublin has won cautious approval for launching an austerity programme to tackle its public finances, the worst in Europe, and for vowing to sort out its banking sector, which is reliant on government guarantees to secure wholesale funding.
Economists would rather the government had focused more on cutting spending, which is politically difficult, rather than raising taxes, which could hamper Ireland's ability to bounce back from its worst recession on record.
There is also some queasiness over how much debt Ireland will have to raise to set up its "bad bank", which could see Dublin acquiring majority stakes in the country's lenders.
On Friday, 20 leading academic economists wrote an opinion piece advising the government to temporarily nationalise the banks instead.
"Nationalisation at least means we do not overpay for these assets and at the end of the day we own the cleaned-up banks and that is going to be an asset to the taxpayer in the future," said Professor Karl Whelan of University College Dublin, one of the signatories. (Reporting by Carmel Crimmins and Padraic Halpin; Editing by Andrew Macdonald)