DUBLIN (Reuters) - Royal Bank of Scotland's (>> Royal Bank of Scotland Group) Ulster Bank set aside money for a potential sale of distressed mortgages on Friday, despite a political backlash over similar plans by other Irish lenders.

Irish banks are still grappling with large stocks of legacy bad loans a decade after a severe property crash and some have plans to offload packages in a bid to draw a line under the problem.

However, a planned 3.7 billion euro (3 billion pounds)portfolio sale by majority state-owned permanent tsb sparked vocal political opposition this week over the likelihood that mortgages would be sold to non-banking entities.

Ulster Bank, which is under pressure from European regulators to cut its level of non-performing loans to around 5 percent from 15.9 percent at the end of last year, said it had changed its strategy to allow for sales of distressed loan portfolios that are in unsustainable, long-term arrears.

"We would see maybe a third of the total (distressed) book as being appropriate for a potential sale," Ulster Bank's outgoing chief executive Gerry Mallon told national broadcaster RTE.

Ulster Bank has 20,000 customers in arrears and asked if that meant a potential loan sale could include 7,000 mortgages, Mallon said "possibly".

Such portfolios have been snapped up by large private-equity and investment firms, many of whom are not regulated in Ireland but use regulated 'credit servicing firms' to service the loans.

While repossessions are rare by international standards in Ireland with banks pushed to seek to restructure loans instead, opposition parties say so-called vulture funds are much more likely to seek a swifter resolution.

Mallon said the very high degree of legal and regulatory protection Irish mortgage customers are offered would not be altered "one little bit" by the transfer of loans to a non-banking entity.

The opposition to the permanent tsb portfolio, which includes some 14,000 homeowners, has forced Ireland's minority government to review the regulatory framework.

Ireland's main opposition party Fianna Fail, whose backing the government relies on in parliament, wants to extend the scope of regulation to such funds. However, analysts say such a change could lower the price tag for future sales.

Ulster Bank's change of strategy was "presumably in response to the well-documented interest" in planned sales by permanent tsb and Allied Irish Banks (>> AIB Group plc), Goodbody Stockbrokers analyst John Cronin wrote in a note.

(Reporting by Padraic Halpin; editing by Alexander Smith)