DUBLIN, Nov 5 (Reuters) - Ireland cannot avoid cutting the public sector paybill in December's budget to stabilise the deficit, ministers said one day before a nationwide protest of state workers against proposed cuts.

Fitch on Wednesday cut Ireland's credit rating by two notches to 'AA-' citing falling tax revenues in a severe recession and a jump in government debt due to plans to pay 54 billion euros to cleanse banks' balance sheets.

Finance Minister Brian Lenihan told a conference on Thursday he wanted to stabilise the budget deficit at 12.5 percent of gross domestic product, in an apparent slight upward adjustment of his previous forecast.

'With further weakening on the tax side ... it's now at 12.5 percent,' Lenihan told a conference. 'We have to stabilise and lock in at that figure.

'We won't have credibility on world markets and won't ... demonstrate the capacity to run our own affairs if we don't lock in at that 12.5 percent now,' said Lenihan, who had earlier forecast a 12 percent budget gap for 2009 and 2010.

Fitch forecast a deficit of 12.5 percent for 2009 and 12 percent for 2010.

Speaking at a different event, Prime Minister Brian Cowen said there was little room to bargain over his proposal to save 1.3 billion euros from the public sector paybill as part of 4 billion euros of total savings targeted in the Dec. 9 budget.

'This adjustment is unavoidable since pay forms such a large part of public expenditure,' Cowen said.

Unions, which are also mulling a public sector strike on Nov. 24, argue that spending cuts would hit essential services such as ambulances and not merely bureaucratic inefficiencies.

In a report on Ireland on Wednesday, the Organisation for Economic Co-Operation and Development (OECD) said however that there was scope for cutting resources even in the sensitive areas of education and health without damaging the quality of services.

Public sector workers have already taken an effective paycut via a levy on their pensions earlier this year, which Lenihan said showed the state sector could be as flexible in adapting to a strongly deflationary environment as the private sector.

'Great credit is due to the public servants who have taken a great deal of public abuse ... and have accepted this particular adjustment,' Lenihan said. 'This shows there is a tremendous resilience in the Irish workforce.'

(Reporting by Andras Gergely and Padraic Halpin, editing by Patrick Graham) Keywords: IRELAND BUDGET/

(andras.gergely@reuters.com; +35315001529; Reuters Messaging: andras.gergely.reuters.com@reuters.net)

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