Anglo Irish mulls buyback as scraps Tier 1 interest

* Anglo Irish says not paying Tier 1 coupons on EU ruling

* Lender reiterates possibility of buyback/exchange offer

By Natalie Harrison

LONDON, July 9 (Reuters) - Nationalised lender Anglo Irish Bank [ANGLLN.UL] said on Thursday it would not pay interest on its lowest-ranked Tier 1 debt, but said it was considering an offer to holders of $4.4 billion of its subordinated bonds.

Anglo Irish was bailed out by the Irish government earlier this year to the tune of up to 4 billion euros ($5.6 billion) and has been a factor in the sovereign ratings downgrades of a nation that before the financial crisis basked in the sobriquet "Celtic Tiger".

As a condition of that state rescue, the European Commission has ruled that the lender cannot pay interest on its Tier 1 bonds -- the lowest-ranked debt that sits just above equity -- which is next due in September, the lender said.

In addition, the bank reiterated that it was still considering a "Liability Management Exercise" that would involve an offer for five Tier 1 bonds, one Upper Tier 2 bond and one Lower Tier 2 bond.

"Anglo Irish is trying to smooth over the very bad news that it will not be paying coupons any more with this buyback comment, but it has been mentioned before, and we still haven't see anything," said a trader.