DUBLIN, Oct 3, 2008 (AFP) - Ireland's sweeping new emergency bank deposit guarantee scheme followed a warning from the central bank that the country's financial stability was at risk, the bank said on Friday.

The bank's governor John Hurley said the two-year scheme to guarantee the country's six main banks was taken to 'to protect the stability of the domestic financial system.'

He said the effect of the disruption in international financial markets on Ireland came to a head last Monday and he told Finance Minister Brian Lenihan the 'supply of funding to the Irish banking system was seriously threatened.'

'I had to inform the minister that the risks to financial stability were becoming unacceptably high with knock-on effects for the wider economy.

'A major consideration was that the highly concentrated nature of the Irish banking system created a high risk of contagion.

'Decisive action to protect the stability of the economy and its financial system was needed,' Hurley said in a statement as the bank issued its quarterly bulletin.

The guarantee scheme has led to protests that it gives Ireland's financial sector a competitive advantage over neighbouring countries.

Britain in particular has argued that the guarantee, covering Ireland's six main banks, is unfair amid fears of a surge in savings from British banks into Irish deposit accounts.

Hurley said the access of the Irish banking system to term funding was affected in a similar way to its international peers with the pressures becoming particularly acute during recent weeks.

This followed 'difficulties in state-sponsored financial institutions, investment and high-street banks both in the US and then Europe, and over the last weekend the failure to pass the US legislation.'

Hurley said the Irish banking system, unlike many of its international peers, has not to date had to write-off significant losses on loans and investments so that bad debts and loan losses were not the key issues last Monday.

The issue was the 'unprecedented shortage of liquidity in financial markets and the urgent need to implement a solution that targeted that issue directly,' he added.