Switzerland will ask parliament to turn a deal with Washington that got bank UBS off the hook in a tax evasion case into binding law, plugging a legal hole that is stopping Berne from honoring the agreement.

To settle a bitter dispute, UBS and the Swiss government agreed in August to disclose 4,450 secret accounts that U.S. citizens used to hide money from tax authorities.

But the settlement hit a stumbling block after a Swiss court ruled in January that such a transfer of data would breach existing Swiss law.

The tax row and uncertainty surrounding the settlement has led to billions of Swiss francs of client withdrawals at UBS.

By asking its parliament to approve the deal, Switzerland would do away with a legal distinction between tax fraud and tax evasion in providing assistance to the U.S. and be allowed to speedily deliver the data Washington is seeking.

We will in this way uphold the international commitments made by Switzerland with a view of finding a definitive resolution to the legal and sovereignty conflict with the United States, the Swiss government said in a statement.

The future of UBS, still Switzerland's largest bank by assets, is crucial for the stability of the Swiss financial market, whose tradition of bank secrecy is under attack in the United States and in Europe.

Switzerland manages $11.3 trillion of assets, making it the third-largest financial market after the United States and Britain. It is the leading global offshore center with $2.3 trillion in assets. The Swiss government will unveil a strategy on how to support its financial services industry on Thursday.

INTENSE DISCUSSIONS AHEAD

The Swiss administrative court ruling caused embarrassment for the Swiss government as it risked prolonging a legal nightmare for its already hard-pressed bank giant.

Although Swiss politicians are known to rule by consensus and shy away from the open confrontation seen in other countries, the fact that the government has in the past introduced ad hoc measures to help UBS has ruffled some feathers.

Approval is likely to require intense parliamentary discussions, a top Swiss politician told Reuters.

Right now we haven't got the numbers (to approve it), said Flavio Abate, a member of the Swiss liberal party who heads the financial commission in the Lower House of Parliament.

The situation risks becoming problematic, he said.

UBS said in a statement it intended to fulfill all

commitments under both a criminal and civil settlement of the tax row. This included providing relevant client account information to the Swiss tax authorities.

Swiss bank secrecy laws prevent Berne from automatically sharing tax information with foreign authorities. Each request needs to follow an administrative process and clients of Swiss banks can appeal against a request for data transfer in court.

Shares In UBS were up 2.14 percent at 14.77 Swiss francs at 1600 GMT, outperforming a 0.5 percent rise in the European DJ Stoxx banking index.

The U.S. Internal Revenue Service (IRS) had no immediate comment.

(Additional reporting by Kim Dixon in Washington; Editing by Rupert Winchester)

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