Switzerland and Britain signed an agreement on Tuesday to begin taxing funds held by wealthy British clients of Swiss banks from January, after altering the terms of a withholding tax deal to appease the European Commission.

Switzerland is racing to finalise deals with Britain and Germany to give Swiss banks enough time to plan to levy the tax before it goes into effect in 2013. The British accord is significant because it contrasts with opposition in Germany to a similar deal.

The EU backed down from its opposition to the British deal two weeks ago after Switzerland agreed to bring the pact into line with EU rules.

Specifically, interest income will now be subject to an existing EU-Swiss agreement of 35 percent, plus an additional 13 percent to ensure tax compliance, which adds up to an unchanged rate of 48 percent tax.

The agreement not only respects the protection of bank clients' privacy applicable in Switzerland but also ensures the implementation of the UK authorities' legitimate tax claims. In addition, mutual market access for financial services will be improved, the Swiss government said in a statement.

Switzerland's deals with Britain and Germany, struck last year, are seen as a litmus test of whether the country can seal similar deals across Europe and further afield. However, the EU challenges and German domestic opposition have thrown those deals into question.

Switzerland is seeking such deals in order to preserve bank account secrecy, the cornerstone of the country's $2 trillion financial services industry. Secrecy has been under attack in recent years as cash-strapped governments crack down on undeclared funds held in hidden Swiss accounts.

(Reporting By Katharina Bart; Editing by Ruth Pitchford)