Irish government in by-election pounding

(DUBLIN) - Debt-laden Ireland's embattled government suffered a heavy defeat Friday in a key by-election, cutting its already slim parliamentary majority as it battles to finalise an international bailout.

The big reverse for Prime Minister Brian Cowen's Fianna Fail party in Donegal, northwest Ireland, raised the pressure on his beleaguered FF/Green coalition to call immediate general elections as their majority fell to two.

Meanwhile European Union heavyweights Germany and France urged a rapid conclusion to talks on assistance for Ireland worth 85 billion euros (114 billion dollars), with a possible announcement on Sunday.

The socialist Sinn Fein party won the Donegal constituency, previously a Fianna Fail stronghold.

Opposition parties said the government had no mandate to push through its draconian set of measures to reduce the massive deficit of the one-time "Celtic Tiger" economy.

Ireland's austerity plan and a budget on December 7 are crucial steps to show its fellow members of the 16-nation euro area that it is putting its finances in order.

But Cowen has refused to go to the polls until lawmakers have passed the budget, which is unlikely to happen until January.

Sinn Fein president Gerry Adams said the Donegal poll showed voters were set against Cowen's plans.

"The government should postpone the budget and call an immediate general election," he said.

Labour Party leader Eamon Gilmore said the Fianna Fail vote had collapsed and Cowen's party faced "political wipeout" at the general election.

"The Donegal result again shows that Fianna Fail has neither the political mandate nor the moral authority to make the crucial decisions the country now faces," he said.

Deputy Prime Minister Mary Coughlan admitted: "When it comes to a general election, yes, we are going to have a tough fight. It is a very difficult time."

The government was also preparing for tens of thousands of demonstrators to take to the streets of Dublin on Saturday in protest at the austerity measures.

"People need to show there is an alternative. It is important they show how they feel about a plan that will increase unemployment," Macdara Doyle, spokesman for the Irish Congress of Trade Unions, told AFP.

The austerity plan announced Wednesday will cut the minimum wage and slash 25,000 public sector jobs, as Ireland strives to bring its deficit back under three percent of gross domestic product from its current level of 32 percent.

Jack O'Connor, president of SIPTU, Ireland's biggest union, said fears that the demonstration could become violent would not prevent its members from turning out.

"There's an attempt at scaremongering to dissuade people from participating but I'm not worried about violence," he said.

Meanwhile, German Chancellor Angela Merkel and French President Nicolas Sarkozy united to push forward the talks on the Irish bailout amid fears of contagion spreading throughout the eurozone.

The two leaders spoke Thursday and "agreed that negotiations with the Irish government must be rapidly concluded," Merkel's press office said.

Sources in Brussels told AFP that the bailout talks would wrap up Sunday, probably in order to make an announcement before markets opened on Monday.

The Irish Times newspaper reported that officials involved in the bailout were examining how senior bondholders could be compelled to pay some of the cost of rescuing Ireland's debt-ridden banks.

But international intervention to help Ireland has failed to shore up the euro.

The growing fears of contagion spreading to Portugal and the far larger Spanish economy caused the euro to slip to a two-month low against the dollar at 1.3201 dollars, although it recovered slightly later Friday.

Spanish Prime Minister Jose Luis Rodriguez Zapatero insisted Friday that he could "absolutely" rule out an Irish-style bailout for Spain, whose economy is twice the size of Ireland, Greece and Portugal combined.

Portugal meanwhile rushed to quash suggestions its euro partners were pushing it to seek a bailout to ease pressure on Spain, as lawmakers in Lisbon gave the final nod to a deficit-slashing 2011 budget.