Restrictions on mortgage lending proposed by the Central Bank could push up rents and frustrate potential homebuyers, the Finance Department has said.
This would make the country less attractive to foreign firms, the department added.
The Central Bank has proposed the mortgage limits as house prices begin to rise quickly amid a lack of supply in key urban areas.
The measures would require banks to restrict lending above 80% of the value of a home to no more than 15% of the aggregate value of all housing loans, while also limiting lending in excess of three and a half times a borrower's gross income.
The Central Bank said today it had received 110 individual submissions and 47 responses from industry groups and financial institutions to its consultation paper on the proposed introduction of a 20% deposit on mortgages.
The deadline for the submissions passed at midnight.
The Central Bank said these submissions will be made available on its website in full once they have been processed.
In its official response to the proposals, the Finance Department said such a loan-to-value (LTV) limit would be unduly restrictive and have implications for the distribution of home ownership.
First-time buyers especially would find it more difficult or "even impossible" to save a deposit while also paying high rents.
"The primary balance to be struck is to ensure that measures put in place to protect financial stability will not have an undue negative impact on sustainable economic recovery or have unintended social impacts," the department stated.
"There is, therefore, a strong case to be made to the Central Bank in adopting a more nuanced and graduated approach to the introduction of new macro prudential measures," it added.
The Department suggested that a graduated approach could be achieved by initially adopting a 90% LTV target which would be reduced over a period of time. A higher threshold exemption of perhaps 25% of new lending might also first be adopted.
The Finance Department also urged that the new rules be phased in.
The country's banks have previously called on the central bank to scale back the proposals, warning that they would price first-time buyers out of the market.
At the Oireachtas Finance Committee last month, Bank of Ireland chief executive Richie Boucher said the rules could have unintended consequences and could see house hunters turning to riskier, unsecured debt to make up the deposit shortfall.
Ulster Bank's chief executive Jim Brown told the committee that nearly 70% of first time buyer mortgages approved by his bank this year would not have met the new deposit criteria.
The Governor of the Central Bank, Patrick Honohan, has indicated that the mandatory 20% rule could be eased for first time buyers through the introduction of a deposit insurance scheme.
He also hinted that the January 1 deadline for the introduction of the rules might be extended.