(Reuters) - Ireland's main opposition party said on Wednesday it had no moral or legal obligation to honor all of its banks' debt as it prepared to vote against a controversial multi-billion euro EU/IMF bailout.

The center-right Fine Gael party, which will likely lead a coalition government following an election next year, said it would seek to renegotiate the 85 billion euro ($113 billion) rescue package to ease the burden on the taxpayer.

The EU/IMF deal provides enough money to recapitalize its banks, shattered by bad debts, while preserving full repayment of its senior bonds -- those first in line to be repaid in the event of any default.

But Fine Gael said investors who hold bank senior debt not covered by a government guarantee, amounting to around 15 billion euros, should take a share of losses, so lessening the amount that Ireland had to borrow under the EU/IMF deal.

"You have the obscene situation now where the poorest of the poor in Ireland, through their taxes and welfare cuts, are being asked to guarantee the speculation of investors in hedge funds," Michael Noonan, Fine Gael's finance spokesman, told the national broadcaster RTE ahead of a parliamentary vote on the deal.

"Ireland has no moral or legal obligation to cover this debt. That's why it's a bad deal, that's one of the principal reasons we're going to vote against it, and that's why it has to be renegotiated."

Finance Minister Brian Lenihan dismissed as "frankly laughable" opposition suggestions that they could negotiate a better interest rate on the bailout package.

"The only renegotiation possible is on the conditionality of the program not the interest rates," he told a parliamentary debate on the rescue package.

Prime Minister Brian Cowen is expected to get the package through the lower chamber with the support of at least two independent MPs, but the prospect of a change of government after an election, possibly in March, means political uncertainty will remain.

"They were talking about holding the election in January a while ago, now March is being mentioned. The longer it drags on, the more of a negative it becomes," said Ken Darmody of Goodbody Stockbrokers.

"Investors would prefer to have a new government in place because at the moment you don't know what the policies really are of the two (parties) that are possibly going into power."

EUROPE CALLS THE SHOTS

Noonan's warnings about unguaranteed bank senior debt nudged the price of the debt slightly lower on the secondary market.

"It's not a game changer as of yet because ultimately Europe are calling the shots here, and they have said they don't want any pain for senior bondholders," said Gavin Curran, a bond trader at Dolmen Securities.

Opinion polls indicate Fine Gael will form a coalition government with center-left Labour after the next election.

Both parties are campaigning to renegotiate the bailout but, given Ireland's dependence on the rescue package to shore up its banks and finance its deficit, and having signed up to its tough fiscal targets, their room for maneuver may be limited.

Concerns about the euro zone's debt crisis escalated on Wednesday after the ratings agency Moody's said it had put Spain on review for a possible downgrade. [nL3E6NF0D8]

The premium that investors demand to hold Irish 10-year debt over benchmark German bunds stood at 545 basis points, an increase of 4 basis points on the day but still an improvement from over 700 basis points when the bailout was first unveiled.

SHOCK WAVES

The bailout is designed to end a two-year banking crisis that has brought the Irish economy to its knees and sent shock waves through the euro zone.

In return for 50 billion euros in sovereign funding and 35 billion euros in capital top-ups for its banks, Ireland has promised to shrink and radically restructure its lenders and tackle the worst deficit in Europe by 2015 at the latest.

Dublin will squeeze 15 billion euros -- equivalent to around 10 percent of annual economic output -- from its deficit over four years, starting with the 2011 budget's record package of 6 billion euros in spending cuts and tax rises.

Some economists have warned that such aggressive austerity measures will tip the domestic economy into a prolonged downturn, jeopardizing its ability to meet its deficit targets and deal with the debt crisis.

In an attempt to bring order to the banks, parliament will also vote on Wednesday on a new law giving the government extensive power to restructure the sector, including the power to impose losses on subordinated bondholders. [nLDE6BD1LA]

Dublin said on Wednesday it had injected over half a billion euros into the building society EBS to shore up its balance sheet. [nLDE6BE0BF]

There will be a two-hour debate on the bailout package before a vote, likely in the early afternoon. A vote in favor will enable the IMF to approve its 22.5 billion euro portion of the bailout on Thursday.

Dublin expects to start tapping the funding early next year.

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