Dublin signaled on Monday that it might wind down Anglo Irish after the rescue left it with the biggest budget deficit in the European Union last year, and raised investor fears that the costs could continue to spiral.
Ratings agency Standard & Poor's estimated last week that the final cost of purging Anglo of bad debts accumulated during the property boom could hit 35 billion euros.
But Anglo's chief executive, Mike Aynsely, told Reuters that the government's 25 billion euro cost estimate was realistic.
"I think it's about right given where the market is," Aynsely said in a telephone interview.
Ireland's budget deficit is expected to exceed 20 percent of gross domestic product (GDP) this year, due partly to the cost of Anglo's rescue, and investors' concerns over Ireland's mounting sovereign debt pile have driven up borrowing costs.
The premium investors demand to hold 10-year Irish bonds over German Bunds was hovering close to euro-era highs of 366 basis points on Tuesday. Irish financial stocks were trading down nearly 2 percent.
Anglo, the worst-performing company in Irish corporate history, reported a first half loss of 8.2 billion euros after taking an impairment charge of 4.8 billion euros and booking a loss of 3.5 billion euros for transferring loans to NAMA, Ireland's state-run "bad bank".
Once the poster child of the "Celtic Tiger" economy, Anglo Irish has become a millstone for Prime Minister Brian Cowen, whose fiscal achievements have been overshadowed by its losses and who is under pressure to wind it down.
Aynsley said he would prefer to see Anglo restructured into a good bank and bad bank but that the position of the European Commission, which is holding discussions with the government about Anglo's future, was crucial.
Recent media reports have suggested Brussels would rather close Anglo down than keep a substantial chunk open in a good bank/bad bank split.
Aynsley declined to comment on the EC's views but said he expected a decision on the bank's future next month.
The escalating cost of dealing with Anglo Irish has raised the stakes for the country's other banks as they prepare to refinance a wall of debt next month and wean themselves off a government guarantee of their liabilities.
Irish Life, the country's largest life insurer and fund manager, said on Tuesday it expected debt markets would start to thaw toward Irish banks once the sector refinances around 25 billion euros worth of redemptions next month.
Shares in the bancassurer were the one bright spot among Irish financials on Tuesday after it shrank first-half losses, defying expectations for a bigger shortfall, and said it expected Irish residential mortgage arrears to peak this year.
Anglo's Aynsley said Ireland's commercial property market, where prices have more than halved since a 2007 peak, would continue to suffer in the short term.
Anglo is transferring around 36 billion euros worth of property loans to Ireland's bad bank or NAMA and Aynsley said he expected the remaining 20 billion euros to be sold to NAMA at a discount of 60-65 percent, matching a near-62 percent discount on the last tranche of loans sold.
