Bern  - The Swiss Federal Council rejected criticism Friday which had been directed at the Alpine nation over tax issues, saying that privacy in banking remained intact.

In a statement, the council, the executive branch of government, said it would, however, work "to improve cooperation with other countries in the area of tax offences."

The Council added that "it is prepared to enter into dialogue with third countries on the taxation of savings income." To do so, it set up a "group of experts," which includes civil servants, bankers and academics, to advise the government.

UBS, the Swiss banking giant, has recently come under fire in a tax investigation in the United States.

Under orders from the Swiss regulatory body, UBS handed over last month some data on clients who allegedly committed tax fraud to US authorities. It also paid a hefty fine of 780 million dollars.

The bank told a Senate hearing on Wednesday that it would not hand over more data owing to Swiss banking secrecy laws. The US is demanding information on 52,000 clients, while the bank is reported to have transferred unspecified data on only a few hundred.

Switzerland is said to house about a third of the 7 trillion dollars held offshore globally. Swiss bankers, who profit from the system, say the collapse of banking secrecy could halve the financial sector, which currently makes up about 12 per cent of GDP.

"The need for appropriate protection of privacy of citizens from unwarranted state intervention is deeply rooted among the Swiss population," the government said, but added that privacy would not provide cover for tax offenses.

The Swiss law book makes a distinction between tax evasion and tax fraud. Currently, only the latter is a criminal offence, though it has been implied that this too would be up for negotiation. dpa