UPDATE 1-IL&P says has $120 mln exposure to Icelandic banks

* Investments totalling $120 million in 3 Icelandic banks * Shares extend rally, erase Monday's losses

(Adds details, market reaction)

DUBLIN, Oct 28 (Reuters) - Irish Life & Permanent (IPM.I) announced on Tuesday a lower-than-expected further exposure to three Icelandic banks, sending its shares soaring.

Shares came off earlier highs and by 1130 GMT traded 31.6 percent higher at 2.0 euros, erasing Monday's heavy losses.

The bank and insurance group said the nominal value of its investments in Glitnir, Landsbanki and Kaupthing KAUP.IC banks was 62 million euros ($78 million) plus $42 million, in senior debt notes issued by the Icelandic banks, with maturities ranging from 2008 to 2012.

IL&P (IPM.L) said it had already accounted for 16.7 million euros of that exposure in its interim statement in June, resulting in a total previously undeclared exposure of 74 million euros.

"The recovery, if any, of these debts due will be dependent upon action taken by the Icelandic government," it said in a statement.

"Absent any such action, Irish Life & Permanent anticipates that it will create impairment provisions to cover substantially all the outstanding debt."

IL&P had said on Thursday it had some exposure to Icelandic bank debt, without detailing the investments, which together with a global equities sell-off sent its shares tumbling from over 3 euros to as low as 1.25 euros on Monday.

"People were expecting much worse (exposure) and the news is better than expected," a Dublin-based trader said. (Reporting by Andras Gergely and Jonathan Saul; Editing by Paul Bolding)