UPDATE 1-Ireland CDS widens as Anglo-Irish nationalised

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By Natalie Harrison

LONDON, Jan 16 (Reuters) - The cost of protecting Ireland's debt against default rose sharply on Friday after the country nationalised Anglo-Irish Bank ANGL.I, as markets worried about the impact of the move on the economy.

Five-year credit default swaps on Ireland's sovereign debt were quoted at a 250 basis point mid-point by two traders, although bid-offer spreads varied, roughly 30 basis points higher from a day earlier.

"At worst it' going to lead to fresh worries about how the Irish economy survives this crisis and how they can service their increasing debt burden," Deutsche Bank credit strategist Jim Reid said in a research note.

On Monday, Ireland's CDS -- contracts offering protection in case of a default of a creditor such as a company or a government -- still stood 184 basis points.

Five-year CDS on Anglo-Irish widened to about 450 basis points on Thursday but there were no offers, one of the traders said. There had been no trades early on Friday.

"I would expect Anglo-Irish to settle around the 300 basis points level, closer to the government CDS. This is a sovereign CDS story rather than a bank CDS problem," he said.

Ireland's government nationalised Anglo Irish on Thursday to prevent a possible collapse after its shares had gone into freefall since a loan scandal last month.

Full state control would ensure that the lender's 80 billion euros ($106.2 billion) worth of deposits would be secure, the government said.

(Reporting by Natalie Harrison, Jamie McGeever and Douwe Miedema)