April 3 (Bloomberg) -- Ireland’s economy will shrink as much as 12 percent between 2008 and 2010, as a construction slump deepens and unemployment surges, the country’s central bank forecast.

Gross domestic product will drop 6.9 percent this year and 3 percent in 2010, the Dublin-based bank said in its quarterly bulletin published today. The bank in January forecast a 4 percent contraction this year. Unemployment will soar to around 14.4 percent next year, the bank said.

Ireland is mired in one of the worst recessions in its history as a slump that began with the ending of a decade-long property boom is amplified by the global credit crisis and cooling export demand. Companies including Dell Inc, Royal Bank of Scotland Group Plc and C&C Group Plc are shedding jobs, pushing up unemployment and leaving the government with a widening budget deficit.

“It is critical that firm and decisive action is taken to reverse the major deterioration in the general government deficit,” the bank said in the report. “Fiscal sustainability is necessary for the restoration of confidence in the economy.”

The government, which had its top credit rating downgraded by Standard & Poor’s this week, will present an emergency budget on April 7, to start plugging the hole in state finances. The budget deficit soared tenfold to 3.72 billion euros ($5 billion) in the first quarter, the Finance Ministry said yesterday.

To contact the reporter on this story: Colm Heatley in Belfast at cheatley@bloomberg.net

Last Updated: April 3, 2009 06:00 EDT