* Says a further 10 percent of Irish portfolio to be impaired
* To increase level of provisions for Irish portfolio
* Lloyds closes down 3.6 percent, RBS falls 5.7 percent
* Lloyds' Irish warning hits sterling
(Updates shares, impact on sterling, fund manager comment)
By Sudip Kar-Gupta
LONDON, Dec 17 (Reuters) - Part-nationalised British bank Lloyds warned it would take a further hit from its troublesome Irish portfolio as a result of Ireland's economic problems.
Friday's update on its Irish exposure caused Lloyds' shares to fall sharply, dragging down rivals such as part-nationalised Royal Bank of Scotland, which is exposed to Ireland via its Ulster Bank unit.
Shares in Lloyds, 41 percent-owned by Britain's government, fell as much as 6.2 percent to an intraday low of 64.69 pence.
They recovered to close down 3.6 percent at 66.50 pence, while RBS fell 5.7 percent. The two banks were among the biggest losers on Britain's blue-chip FTSE 100 index, which ended down 0.2 percent.
Cornelian Asset Managers fund manager Bill Bullough said his company was sticking to its underweight exposure to British banks due to ongoing uncertainty plaguing the sector.
"The biggest problem seems to be it's unclear what exactly is their exposure to a number of negative areas," said Bullough.
Lloyds' warning over its Irish exposure also caused sterling to fall on foreign exchange markets.
Last month, Ireland had to seek an international rescue package, but its continuing economic turmoil was highlighted on Friday as credit rating agency Moody's cut the debt-ridden country's rating by five notches.
Lloyds said a further 10 percent of its 26.7 billion pound ($41.7 billion) Irish portfolio would be impaired by the 2010 year-end.
According to Thomson Reuters I/B/E/S, Lloyds is expected to report full year 2010 pre-tax profits of around 2.6 billion pounds. The Irish impairments could hit this figure and several analysts said they were reviewing their profit forecasts.
Lloyds said it would raise the level of provisions against the portfolio and that it expected an increase in the impairment charge relating to Irish exposure for the full year to some 4.3 billion pounds.
The bank said this would result in an increase in provisions as a percentage of impaired Irish loans to approximately 54 percent at the 2010 year-end.
Lloyds was saddled with billions of pounds of losses after buying troubled rival HBOS at the height of the credit crisis in a rescue deal brokered by the Labour government of the time.
The state subsequently took a 41 percent stake after spiralling bad loans forced Lloyds into a taxpayer-funded bailout. The bank's new chief executive, Antonio Horta-Osorio, is due to replace Eric Daniels in March.
In August, Lloyds said it was closing its Irish business banking operation and would effectively be pulling out of the country, but was still exposed to Ireland via existing loans.
($1=.6400 Pound)
(Additional reporting by Dominic Lau; Editing by Rosalba O'Brien and David Hulmes)