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* Agreement still needs approval of union members
* Smaller unions walked out of talks, dispute risks remain
* Higher paid workers take pay cut, others work longer hours
By Stephen Mangan
DUBLIN, Feb 25 (Reuters) - The Irish government agreed with the largest public-sector trade unions on Monday to extend a pay deal that has been credited with avoiding the kind of industrial unrest seen in other crisis-hit euro zone countries.
The update to the Croke Park agreement would provide savings of 1 billion euros ($1.3 billion) over three years, a key part of government efforts to meet targets under Ireland's 85 billion euro EU-IMF bailout.
But the deal still needs the approval of hundreds of thousands of union members, while the leadership of six smaller trade unions have walked out since talks started at the beginning of the year.
"I'm satisfied the proposal is the best one that could be achieved through negotiation," Jack O'Connor, president of SIPTU, Ireland's largest trade union, told Reuters.
"But industrial action is not off the cards. The majority of union members may decide to reject this proposal," he said.
The deal guarantees that there will be no compulsory redundancies in the public service, but will see workers earning more than 65,000 euros a year accept pay cuts of 5 to 10 percent, the government said in a statement.
Public servants will also be asked to work longer hours, have their overtime payments reduced, while those who work on a Sunday will receive a 75 percent premium, down from 100 percent at present.
"NO SIMPLE CHOICES"
The government in recent weeks had threatened that if there was no agreement on the 1 billion euros of cuts that it would introduce them unilaterally.
Ireland's spending minister Brendan Howlin on Monday refused to be drawn on what would happen if the unions rejected the measures, but said there would be no alternative to the deal which was agreed after talks went through the night.
"Either we do it on the payroll side or we cut front line services further - health , education, social protection. There are no simple choices here," Howlin told Newstalk Radio.
The six unions that left the talks, who represent the police, nurses and lower-paid civil servants, account for around one-third of Ireland's near-300,000 public sector workers.
Irish trade unions' cooperation with successive governments, particularly during recent rounds of tough austerity measures, has helped the country make greater progress than any other troubled euro zone debtor to revive its economy despite the deep cuts.
Public servants took wage cuts averaging 15 percent before making agreements in the Croke Park deal, which Ireland's strongest public sector unions signed up to in March 2010.
That deal is credited with sparing Ireland the kind of action that has held back fellow bailout recipient Greece, by supporting efforts to revive the economy after Dublin had to bail out its banks and slash budget spending.
"We have achieved far more through negotiation than we could have hoped to gain through protests," said Shay Cody, the chair of the public services committee of the Irish Congress of Trade Unions, an umbrella body.