Irish banks aren't smiling

(Fortune) -- So much for the luck of the Irish.

Just as the U.S. government is extricating itself from Citigroup (C, Fortune 500), taxpayers in Ireland are about to double down on their own supersized banking bailout.

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Even Warren Buffett has gotten burned investing in Irish banks.

The U.S.-listed shares of the two biggest Irish banks, Allied Irish (AIB) and Bank of Ireland (IRE), tumbled Monday as the government prepares to sink more money into the struggling lenders. Allied Irish dropped 15% and Bank of Ireland slid 8% in midday trading.

Analysts expect the government, which already owns large minority stakes in the two banks, to direct them this week to raise new capital to absorb massive losses on bubble-era loans to real estate developers.

By pouring more funds into the banks, the Irish government aims to support a turnaround in its economy, which shrank in 2008 and 2009 after a decade-long growth spurt driven by a giant property boom. The International Monetary Fund said Ireland's economy should contract an additional 2.5% this year.

But another infusion wouldn't come without risk for the Irish government, given the unpopularity of bailouts and the scale of the two banks relative to the economy.

Both Allied Irish and Bank of Ireland control more than $200 billion in assets. Ireland's gross domestic product last year was $177 billion, according to the CIA Factbook.

Speculation that the government will take a tough line with the banks "has reached fever pitch," J&E Davy analyst Emer Lang wrote in a note to clients Monday. He said regulators may tell the banks to raise $10 billion or more between them.

The latest bailout could leave Irish taxpayers owning 70% of Allied Irish and 40% of Bank of Ireland, according to Irish media reports.

The Irish government took over a third bank, Anglo Irish Banks, last year after former CEO Sean Fitzpatrick admitted he took $117 million of undisclosed loans from the bank. He was questioned by police this month and released, according to reports.

So far, Ireland's government has poured nearly $15 billion in capital into the three banks, in addition to setting up a so-called bad bank to buy bad property loans to ease the strain on their balance sheets.

Taxpayers' capital tab could double or even triple this week as officials outline plans for what Goodbody Stockbrokers analyst Eamonn Hughes calls "the big one."

With Allied Irish and Bank of Ireland shares trading in the low single digits, down 90% or more from their bubble-era highs in 2007, it's unlikely the banks will be able to raise all the money in the market -- though Allied Irish, given time, could raise $2 billion or more by selling its stake in M&T Bank (MTB) of Buffalo.

M&T's market capitalization is around $9.7 billion, and Allied owns 24% of the bank. It acquired the stake in 2002, when M&T snapped up Allied's Allfirst Financial unit, then embroiled in a currency trading scandal.

Interestingly, M&T's second-biggest shareholder -- Warren Buffett's Berkshire Hathaway (BRKA, Fortune 500) -- has already had a less than happy experience investing in Irish banks.

Berkshire spent $244 million buying the shares of two unspecified Irish banks in 2008 just before they imploded. The loss led Buffett to conclude in his 2008 letter to shareholders that "the tennis crowd would call my mistakes 'unforced errors.'"

Irish taxpayers can only hope their government isn't about to make one of its own.