DUBLIN (Reuters) - Ireland's coalition government suffered a bruising setback at local elections on Saturday as the opposition Sinn Fein party made major gains to capitalise on frustration over six years of relentless austerity cuts.
Ireland emerged from an international bailout under Prime Minister Enda Kenny's government last year and employment is growing strongly after a long recession, but the economic recovery is not being felt by large numbers of voters.
Kenny's Fine Gael party looked set to narrowly remain the largest party in councils, even though midway through the count it was polling at 24 percent versus 36 percent at parliamentary elections three years ago. More of the backlash was saved for junior coalition partner Labour, whose vote collapsed.
The surge by Sinn Fein, the former political wing of the Irish Republican Army, whose anti-austerity policies helped move it into third place in local polls, will pile pressure on the government ahead of one last austerity budget needed to reduce a deficit that is still among the highest in Europe.
"We went into this government with our eyes wide open to pull this country back from an economic abyss," Kenny told national broadcaster RTE.
"But this vote is one of frustration, is one of anger, is one of saying to government we need you to do better ... Obviously it's not a good day for government. It's been a hard day for (deputy prime minister) Eamon Gilmore and the Labour Party."
Kenny needs the support of Labour to push through October's budget, for which a further 2 billion euros of tax increases and spending cuts must be found. Finance minister Michael Noonan has warned of little leeway unless the recovery picks up pace.
Education minister Ruairi Quinn of the Labour Party said in an interview that if the government were to consider changing course, it could risk damaging recent increases in consumer confidence and in turn stifle economic growth.
Labour, which became the second-biggest party in the state for the first time at the last parliamentary election just months after the bailout began, had 9 percent of the vote after 72 of the 137 local authorities returned first preference votes.
In a separate by-election caused by the resignation of one of its members of parliament, Labour fell to seventh place as Sinn Fein again performed well, narrowly missing out on a seat. Fine Gael was set to hold its seat in a second by-election.
Sinn Fein, which shares power in Northern Ireland but until recently was viewed as a political pariah south of the border, captured 17 percent of the vote to close in on the main opposition Fianna Fail party, which won 23 percent, a similar level to that of local polls five years ago.
Independent and smaller party candidates, traditionally strong performers in local polls in Ireland, were on 28 percent, adding to the pressure on the mainstream parties.
The rise in support for Sinn Fein from a record 10 percent at parliamentary elections in 2011 showed the arrest and four-day detention of party leader Gerry Adams over a 1972 murder earlier this month has done little to halt its momentum.
"The strong performance right across the state indicates that there has been a fundamental shift in terms of public sentiment and political opinion," Sinn Fein deputy leader Mary Lou McDonald said in an interview at a Dublin count centre.
"We haven't by any means reached our potential, much less peaked, but there's no doubt that today is a very significant milestone on the journey to becoming a large, strong political party that can challenge for government."
Counting for European elections begins on Sunday. An exit poll by RTE put Fine Gael in contention to hold its four seats, with Sinn Fein likely to win at least two of the remaining seven and Labour facing a wipeout.
(Reporting Padraic Halpin; Editing by Steve Orlofsky)