* Rothschild replaces Merrill as Irish government adviser * Mandate will cover establishment of Ireland's "bad bank"
* Role includes potential consolidation of banking sector
(Adds background)
By Victoria Howley
LONDON, Sept 1 (Reuters) - The Irish government has appointed investment bank Rothschild to advise on the restructuring of the country's banking sector, a source close to the firm said on Tuesday.
"We will advise the Department of Finance on how to shape the banking system going forward, including the establishment of the National Asset Management Agency and any possible consolidation in the sector," the source said.
Bank of America Merrill Lynch (BAC.N) was hired to advise the government in September, although that contract expired in the summer and was put out to tender in July, a spokesman for the Department of Finance said.
The spokesman confirmed Rothschild's new role.
Rothschild will also advise on dealings with the European Commission and recommend how relationships with lenders participating in the "bad bank" scheme should be managed, according to a tender document posted on Ireland's public procurement website.
Dublin plans to take over risky property loans with a book value of up to 90 billion euros ($129.2 billion) from Allied Irish Banks (ALBK.I), Bank of Ireland (BKIR.I) and other lenders and park them in a National Asset Management Agency, or bad bank, to free up the flow of credit.
Government bonds issued in return for the assets will boost Ireland's national debt by 60 billion euros, according to the median forecast of 6 economists in a Reuters poll on Tuesday, compared with a national debt level of 67 billion euros at the end of July.
(Additional reporting by Andras Gergely)