The cost of bailing out the Irish banks will see the country's deficit rise to a third of the value of its entire economy.
Nearly three-quarters of the £40bn of support is going to Anglo Irish Bank alone.
Taoiseach Brian Cowen gave his strongest indication taxes would have to go up in December's Budget as a result of the bail-out of nationalised lenders who over-extended themselves before the credit crunch.
The Government is preparing to chop "significantly" more than £2.6bn from public services, such as health, education and social welfare.
Mr Cowen said the draconian cuts alone would not be enough to plug the massive gap in the State finances.
"Obviously there will have to be revenue raising as a contribution to closing that gap - it cannot all be done on the expenditure side," he said.
Finance Minister Brian Lenihan said the government would now become the majority owner of Allied Irish Banks.
"The state will become a majority stakeholder in this bank," Mr Lenihan said.
"The bank is unable to attract private capital.
"The bank may be able to make some efforts in that regard (attracting private capital), but the bulk of the capital will be provided by the state."
The euro slipped in the wake of the news about the nationalised lender.
Mr Lenihan said the bank costs would be spread over more than 10 years.
He also said he would double support for Irish Nationwide Building Society to £4.6bn.
The extra costs for Anglo Irish and Irish Nationwide will push Ireland's debt to GDP ratio to nearly 99% this year.
"I think it's bold because what they are doing is really giving us the bad news up front - I think the market needs to know and here it is," said Padhraic Garvey, rate strategist at ING.
"It's a pretty astonishing deficit number, it's higher than the national debt a few years ago which is an incredible situation to be in."
EU officials had earlier pressed Dublin to come up with a detailed plan for getting its fiscal gap - the worst in the bloc - under control by 2014.
After the Irish announcements European Union competition chief Joaquin Almunia welcomed the "clarity" provided by Ireland regarding the state aid provided to troubled its banks.
But Ireland is still at risk from a credit downgrade despite unveiling a "final" bill for bailing out its banks and vowing to get its public finances in order, Fitch ratings said on Thursday.
"Our position has not been changed. The rating is not entirely secure," Fitch senior analyst Chris Pryce said.
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