UPDATE 1-Irish bank shares sink as rescue timing worries weigh

* Bank of Ireland, Allied Irish shares down by up to 26 pct

* "Bad bank" legislation progressing slowly in parliament

(Adds details on timing, updates share price)

DUBLIN, Oct 28 (Reuters) - Shares in Ireland's two main banks, Allied Irish Banks (ALBK.I) and Bank of Ireland (BKIR.I), fell sharply on Wednesday as weakness across European financial stocks magnified concerns over Dublin's bank rescue measures.

Shares in Bank of Ireland fell almost 23 percent by 1045 GMT, extending Tuesday's losses, with Allied Irish down more than 26, compared with a 6 percent lower Irish market ISEQ.. The DJ Stoxx European banking sector .SX7P was down 2.8 percent.

Traders cited worries that the launch of Ireland's 54-billion euro "bad bank", the National Asset Management Agency (NAMA), could take several more weeks, leaving insufficient time for Bank of Ireland to carry out a rights issue this year. [ID:nLP588148]

"The NAMA legislation looks like it's going to be pushed out until the middle of November to get it all signed off," one Dublin-based trader said. "That would leave the window for a rights issue probably too tight."

Ireland's lower house of parliament is this week conducting a detailed debate of the legislation to establish NAMA, with the finance ministry hoping the draft can pass to the upper house by the end of next week and be fully approved in the second week of November.

That compares with a projection in NAMA's draft business plan that the law would be enacted in early November, allowing valuation of the banks' risky commercial property loans to start in that month or December. [ID:nLE421172]

A failure to raise its own funds would make it more difficult for Bank of Ireland to reduce the state's indirect 25-percent shareholding to 15 percent by a Dec. 31 deadline as specified in the terms of the bailout it got earlier this year.

It could also herald further state capital injections at a time when an EU-imposed break-up of Dutch group ING (ING.AS) has increased investor fears over EU sanctions over state aid for banks.

Ireland will also need approval for the NAMA plan itself, though EU Economic and Monetary Affairs Commissioner Joaquin Almunia has already urged Dublin to approve it as soon as possible. [ID:nL9579904] (Reporting by Andras Gergely; Editing by Greg Mahlich)