Switzerland said it would no longer accept untaxed money into its banks as it tries to ease pressure on its $2 trillion offshore banking industry from key trading partners seeking to boost tax revenues.

As it unveiled measures on how to foster the financial services industry on Thursday, the Swiss government also said it wanted to find a solution for the estimated $600-700 billion of undeclared assets still hidden in the country.

We are not interested in untaxed money, finance minister Hans-Rudolf Merz told reporters.

Helping foreign governments in the fight against tax offences while guarding its bank secrecy laws has become a difficult balancing act for Switzerland.

The government has dropped the idea of seeking a single deal as a way to improve EU market access for its firms and wants instead to try and resolve the issue of untaxed money bilaterally with each country, Merz said.

Securing a deal with Germany, Switzerland's largest trading partner, is especially important as Berlin has been the most vocal critic of Swiss banks turning a blind eye to untaxed money flowing into the country.

What matters really is Germany, said Peter Thorne, a banking analyst with Helvea. The Swiss are not the only people who will have to agree, and if the Germans are prepared to buy a list with tax data, the pressure just continues.

Merz said extending an existing withholding tax on income from assets held in Switzerland by non residents or using tax amnesties as a way to help people declare their hidden cash could be issues for bilateral discussions with partners.

But he did not indicate a preferred solution.

NO AUTOMATIC DATA SWAP

Switzerland fell short of offering full transparency to its European Union partners as it said it would not accept the practice of automatic exchange of information relevant for tax purposes in use in all EU states but Luxembourg and Austria.

Automatic exchange of information would be the end of bank secrecy, and I believe it would greatly damage the Swiss financial market, Merz said.

Instead, Merz reiterated Switzerland's general commitment to improve assistance to foreign tax authorities in line with international standards drafted by the Organization for Economic Cooperation and Development.

Switzerland, the world's largest offshore financial center and home to UBS , Credit Suisse and Julius Baer , fears opening up too much would force money out of the Alpine nation to the benefit of rising financial centers in Asia.

Even though Switzerland offered on March 13 to help foreign authorities fight tax evasion, cash-strapped European Union countries cannot directly access bank data on assets hidden in secret Swiss accounts, known as Schwarzgeld or black money.

A damning U.S. tax probe into help UBS gave to Americans seeking to hide money abroad has also weakened Switzerland's international status.

Large neighbors France, Germany and Italy are also keeping the world's largest wealth manager under pressure through a combination of tax amnesties and threats to acquire Swiss bank data from informants.

UBS unveiled earlier in February that it managed around 150 billion Swiss francs ($138 billion) of offshore money belonging to European citizens and said it could lose around a third of that if there were more tax amnesties.

Credit Suisse said assets belonging to residents of Germany, Italy, France and Britain amounted to less than 100 billion francs, adding it may lose around 25 billion francs in the event of aggressive tax amnesties from these nations.

In an interview with German paper Frankfurter Allgemeine Zeitung earlier on Thursday, German Chancellor Angela Merkel said she and Finance Minister Wolfgang Schaeuble had made clear to their Swiss counterparts how important a new double-taxation treaty was, and that she expected an agreement soon.

I have no doubts that my colleague Schaeuble and I will talk about the question of a withholding tax at some stage, Merz told reporters.

We have the next round of negotiations in March. We will also discuss the issue of market access for banks.

(Additional reporting by Lisa Jucca in Zurich and Erik Kirschbaum in Berlin, editing by Will Waterman)

($1=1.086 Swiss Franc)

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