* Irish PM says summit decisions stand, will be implemented
* Analysts see chances of broad deal much reduced
* Bond yields rise sharply, potential blow to bailout success
By Padraic Halpin
DUBLIN, Sept 26 (Reuters) - Ireland insisted on Wednesday that a pledge by European leaders to ease the terms of its bank bailout stands but doubts cast by three powerful EU finance ministers appeared to dash hopes of a broad deal and pushed Irish borrowing costs higher.
Germany, the Netherlands and Finland issued a joint statement that seemed to unravel much of what was agreed at a European Union summit in June, when leaders paved the way for the direct recapitalisation of problem banks.
The trio made a sharp distinction between future banking problems and "legacy" issues, dealing a potentially fatal blow to Dublin's hopes of selling stakes in its viable lenders to Europe's new rescue fund and limiting its options on easing the burden placed on it by failed banks.
"This is not a decision of just three ministers or any other commentators, this is a decision made by the heads of government of the 27 countries of the European Union," Prime Minister Enda Kenny told parliament.
"The difficulty for Europe has always been that you follow through on the decisions that were made. The decision of June 29 was not an opinion, was not a theory... Those decisions stand, those decisions will be implemented."
In June Kenny called the agreement reached by EU leaders a "seismic shift" in policy and with Ireland's costly bank rescue set to push government debt to around 120 percent of gross domestic product (GDP) next year, it needs Europe to deliver.
While Dublin has been chiefly focusing on trying to change the punishing repayment terms associated with recapitalising two failed, state-owned banks, it hoped to retrospectively benefit from the proposal to allow the euro zone's permanent rescue fund, the ESM, to recapitalise at-risk banks.
Ireland had said that if the ESM was to take over its stakes in the mostly state-run banking sector, it would need to do so at prices significantly above their current low valuations, meaning there was no guarantee it would take up the option.
But shifting the bank stakes off the government's books would remove the risk of the state having to foot any future costs, a distinct possibility with mortgage arrears continuing to rise, and something the IMF said could help put Ireland's sovereign bailout on a clear path to success.
"I think the statement reduces the chances of a broad deal certainly," said Goodbody Stockbrokers' chief economist Dermot O'Leary, who separately reduced his growth forecasts for this year and next after weak GDP figures last week.
"If there are to be further losses, which leads to further capital for the Irish banks, you are into legacy assets and those countries don't want to be part of that. From that point of view it is a negative."
The creditor country rebuff, which dominated prime minister question time in Dublin's parliament, pushed yields on Ireland's benchmark 2020 bond 17 basis points higher on the day to 5.21 percent after they dipped below 5 percent for the first time in over two years last week.
Yields were above 7 percent before the June summit and the rally prompted by the EU leaders pledge has led to Ireland's return to short and long-term markets. Further progress will be put at risk if borrowing costs continue to rise.
The mooted removal of the ESM from the equation could also limit the options in trying to replace the so-called promissory notes or IOUs mostly pumped into the failed Anglo Irish Bank.
Ireland has been looking at refinancing the 31 billion euros ($40.18 billion) worth of IOUs by using a long-term government bond or tapping the ESM, and Tuesday's statement could limit those options to just the bond, the option favoured by the IMF.
"The government are now left to focus on a promissory note deal to be negotiated with the ECB, which was always going to be the more likely outcome. To that extent our base case has not changed," said Ryan McGrath, a bond trader at Dolmen Securities.
"It is likely that the government will be able to negotiate some progress on the promissory note, probably refinancing the current annual payment system with a bullet maturity bond."