LONDON, Oct 2, 2008 (AFP) - Finance Minister Alistair Darling urged Ireland to include British banks in its blanket guarantee of deposits, it was reported Thursday, as the banks themselves warned the move was anti-competitive.

The British Bankers' Association (BBA) said the guarantee, announced Tuesday in the face of global financial crisis, put banks 'at a competitive disadvantage', particularly in the British-ruled province of Northern Ireland.

According to The Guardian, it was the fear of an exodus of funds from Britain to Ireland that prompted Darling to intervene twice Wednesday, urging Dublin to extend the guarantee to British banks operating in the republic.

The Irish government shifted some ground late Wednesday, announcing that non-Irish owned banks with a 'significant' high street presence may be included, but this sparked opposition warnings of opening a 'Pandora's box'.

'We are taking up with the Irish government its moves to guarantee bank deposits as this has distorted competition,' the BBA said Wednesday.

'The extent of the guarantee has clear consequences for firms competing to win retail deposits and, while we support proposals aimed at re-introducing stability to the financial markets, we need fair play for financial institutions across Europe.'

The guarantee arrangement, which Irish lawmakers were expected to approve Thursday, covers six main banks and safeguards retail and commercial deposits, as well as bonds, for two years.

The institutions involved are Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.

A spokesman for Finance Minister Brian Lenihan said late Wednesday that he would 'consider applications to join the guarantee scheme from financial subsidiaries with a significant high street retail presence here'.

But Joan Burton, finance spokeswoman for the opposition Labour party, warned that whatever the cost of guaranteeing the six original banks, adding further banks 'will clearly extend it significantly'.

'This move threatens to open up a financial Pandora's box and increases further the potential exposure of the Irish taxpayer,' she said.

Analyst Scott Rankin of Irish stockbroker Davy put the value of the guarantee for the six banks at up to 500 billion euros (720 billion dollars), more than double Ireland's annual economic output of some 190 billion euros.

Irish Prime Minister Brian Cowen earlier defended the move, saying the banks were 'facing an unprecedented situation where there is a credit crunch'.

Lenihan said the decision meant Irish banks would 'find it easier to access funds from world markets'.

Enda Kenny, leader of the main Fine Gael opposition, urged the government to find a 'level playing pitch' for all Irish banks.

'There are a number of retail banks based here that were not mentioned as being covered by the government's scheme, and anecdotal evidence suggests that significant sums are being transferred out of these banks and in to banks covered by the scheme,' he said.

'This would appear to be a particular concern in border county areas (Ireland's border with Northern Ireland) and may also be an issue in the UK.'

Asked if there was evidence of such transfers, the office of Ireland's Financial Regulator Patrick Neary said: 'The measures taken have had a positive impact for the funding profiles of Irish banks.

'However, this is against the background of an international money market that remains tight.'

Eurozone member Ireland, rocked by a property market meltdown and the global credit crunch, has fallen into recession for the first time in 25 years after its economy shrank in the second quarter of 2008, official data said last week.

Irish gross domestic product (GDP) contracted 0.5 percent in the second quarter of 2008 compared with the previous three-month period when the economy contracted 0.3 percent.

The 'Celtic Tiger' economy had not experienced a recession -- defined as two successive quarters of negative growth -- since 1983.