BRUSSELS, Belgium — Europe’s debt crisis hit a critical juncture yesterday, as finance ministers tried to keep Ireland’s market turmoil from triggering a domino effect that could topple other vulnerable nations like Portugal and rock the region’s currency union and shaky economic recovery.

Only months after saving Greece from bankruptcy in May, the 16-country eurozone has been shaken anew by concerns that Ireland will be unable to pay the cost of rescuing its banks, suggesting only another bailout can now soothe investors’ panicky nerves.

The European Union’s top monetary official, Olli Rehn, said the focus was on the banks as the EU works with the European Central Bank, the International Monetary Fund and national governments at a crisis meeting in Brussels.

“The (European) Commission, together with the ECB, IMF, and the Irish authorities are working in order to resolve serious problems of the Irish banking sector and I expect that the eurogroup will support this objective,” said Monetary Affairs Commissioner Olli Rehn.

“This is not a matter of the survival of the euro, this is a very serious problem in the banking sector of Ireland.”

Jean-Claude Juncker, who heads the group of 16 nations use the euro, said that the euro750 billion financial backstop eurozone governments set up together with the IMF last spring could be used to support the Irish banks.

European nations are worried that the tension over Ireland’s stability is making borrowing more expensive for countries like Portugal and Spain, threatening to push them to the brink of default, as happened with Greece. Containing contagion — a market panic that jumps from one weak country to the next — is the priority.

Behind Ireland stands Portugal, one of the eurozone’s smaller member with 1.8 per cent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big — 11.7 per cent of eurozone output — that it could present a much larger challenge if it needs help.

More tensions flared up again over Greece — which was bailed out by eurozone governments and the IMF this spring.

Austrian Finance Minister Josef Proell said that Austria hasn’t yet released its contribution to the next tranche of the euro110 billion emergency loan because the country hadn’t fulfilled the requirements of the bailout agreement, Austrian news agency APA reported.

“The current state of the data doesn’t give a reason to release the tranche in November,” Proell said.

The EU statistics agency on Monday said Greece’s 2009 budget deficit was much higher than previously expected. To received the next portion of the loan, Athens has to cut its defict by a certain amount every year.

The current panic over Ireland began in the wake of revelations that the cost of Ireland’s bank bailout had risen sharply. Sentiment also came under pressure after Germany said bond holders should absorb part of the losses in future bailouts. EU leaders slowed a bond selloff with a statements that existing debt holdings wouldn’t be affected, but couldn’t restore calm.

Ireland has resisted any notion it should take a bailout, which would mean humiliation for the government ahead of possible national elections early next year. Ireland would also lose some control over its finances in return for loans, which could mean being forced to give up the country’s rock-bottom corporate tax rate — a key attraction to businesses that annoys other EU countries that have much higher rates.

Yields on Irish bonds rose again Tuesday as investors’ expectations ebbed for an early decision on an Irish bailout — which would be expected to guarantee they will get paid back on their holdings. The yield on 10-year Irish treasuries rose to 8.24 per cent from Monday’s closing yield of 7.94 per cent.

Ireland’s minister for European affairs, Dick Roche, suggested that others in the EU were panicking over how to manage Ireland’s euro45 billion (US$61 billion) bank-bailout bill and its deficit, which is forecast to reach a staggering 32 per cent of GDP this year, a record for post-war Europe.

“I would hope that after the meeting this afternoon and tomorrow there would be more logic introduced to this. There’s no reason why we should trigger an IMF or an EU-type bailout,” Roche said. “There is a problem with liquidity in banks, but I don’t think the appropriate response to that would be for European finance ministers to panic.”

Ireland says it has sufficient cash to fund government services through June 2011, and has postponed returning to the bond market until early 2011 in hopes that the interest rate demanded by investors will have fallen by then.

Ireland’s banks are in dire trouble due to reckless lending during an overinflated real estate bubble. The government has taken over three — Anglo Irish, Irish Nationwide and the Educational Building Society — and has taken major stakes in Allied Irish Banks and Bank of Ireland. Allied Irish is expected to fall under majority state control within weeks.

David McWilliams, a former Irish Central Bank economist and prominent commentator, said Ireland’s only card worth playing in this week’s Brussels meetings was to admit defeat and stress that Ireland’s problems were Europe’s responsibility, thanks to the euro currency.

McWilliams said Ireland should agree to let the European Central Bank — which has full-time observers inside the Department of Finance in Dublin — take “direct responsibility for the Irish banks, over and above the Irish government.”

That would keep the Irish banks from contaminating the bond market, easing the market turmoil for everyone.

“We need finally to be honest and say to our European colleagues that our banks are bust,” he said. “No matter how much we bluff, that problem’s not going to go away — and our problem is your problem. You have got to help us, because your problem could transfer from Ireland, Portugal and Greece to Spain and Italy. Although it’s not pleasant, we’ve got to defend ourselves. We’ve got to say we’re in this euro together, so what are you going to do for us?”

In an interview with French newspaper Le Figaro published yesterday, Greek Prime Minister George Papandreou insisted his country won’t default on its euro298 billion in debt because doing so would be a “catastrophe” for Greece, Europe and the euro.

On Monday, Greece said this year’s deficit would likely reach 9.4 per cent, well above the 8.1 per cent level it forecast earlier this year when it received a euro110 billion bailout from European partners and the International Monetary Fund.

Portugal, which is struggling with high budget deficits, also saw itself forced to deny rumors that it would seek financial assistance.