ZURICH/GENEVA (Reuters) - UBS UBSN.VXUBS.N shares hit record lows on Friday as Swiss bank stocks reeled on concern a widening U.S. tax probe will weaken the strict privacy rules that underpin Switzerland's wealth management industry.

UBS led the fall in Swiss bank shares. It closed down 14 percent after hitting a new all-time low at 10.54 Swiss francs.

The shares of rivals Credit Suisse CSGN.VX and Julius Baer BAER.VX, both large players in the private banking industry that has thrived thanks to Swiss bank privacy laws, were down 6 percent and 7 percent, respectively.

The DJ Stoxx index of European banks .SX7P was down 6 percent. The bank worries also hit the Swiss franc.

Crisis-hit UBS settled late on Wednesday U.S. criminal charges it had helped rich Americans dodge their taxes. But U.S. tax authorities said on Thursday they were still pursuing a civil lawsuit seeking to access details on 52,000 UBS clients.

“It is very unfair to see that the whole profession has been dragged through the mud,” Ivan Pictet, senior managing partner and scion of one of Switzerland’s largest private banks, said in an interview with the Geneva daily Le Temps.

“The reputation of the whole (Swiss) financial centre has been tarnished by the fault of a single banking institution. It is a very annoying precedent for Switzerland.”

Despite tough Swiss laws protecting bank clients, the government said on Thursday it had no choice but let UBS hand over data to avoid U.S. criminal charges that could have threatened the bank’s existence and hurt the Swiss economy, which is heavily dependent on the banking industry.

It was unprecedented that the data was handed over before a Swiss administrative court had the chance to say whether any fraud was committed and a judgement issued on Friday said the financial regulator was not allowed to hand over the documents.

The judgement, by Switzerland’s Federal Administrative Court, said the financial regulator could not hand over details on bank clients to third parties, in particular to U.S. authorities.

UBS agreed on Wednesday to pay a fine of $780 million (540 million pounds) and to disclose about 250 names of U.S. clients it said had committed tax fraud. But U.S. tax authorities now want the names of thousands of citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts.

“The Swiss made a mistake, they believed that in caving in ... that things would come to an end,” Douglas Hornung, a Geneva lawyer who represents American clients of UBS under U.S. investigation, told Reuters.

“They have now discovered with shock that it continues and the whole Swiss financial centre is in danger.”

People walk past the UBS building on Park Avenue in New York February 19, 2009. REUTERS/Chip East

PRESSURE MOUNTS

Nearly a third of the wealth that is stashed in tax havens around the world is in Swiss banks -- an estimated $2.2 trillion -- making the country the world’s biggest offshore centre. Other havens include Liechtenstein, Bermuda and Singapore.

Tax-dodging schemes are increasingly under attack by governments scrambling to find revenue to finance the soaring costs of government stimulus programmes.

John Christensen, director of the Tax Justice Network, which campaigns against bank secrecy, said he also saw a dramatic shift in public opinion against tax havens.

“It is clear to many that the game is over; the game pretending this is a minor issue,” he said. “Wealth management has become an euphemism for tax evasion.”

The issue will be on the agenda at a meeting of European leaders in Berlin at the weekend to prepare for the April G20 summit on reforming global financial rules.

The German government said on Friday it had taken note of the UBS settlement and said it will continue to push for the implementation of international standards on tax evasion.

Germany, which paid an informant last year to obtain the names of German clients hiding funds in LGT bank of Liechtenstein, is now investigating Prince Max of Liechtenstein for possible tax evasion, the Financial Times Deutschland reported on Friday.

LGT said in a statement that Prince Max, the bank’s CEO who lives in Munich and is the second son of current ruler Hans Adam II, had complied with Germany tax rules and was cooperating with authorities in the investigation.

Switzerland’s European Union neighbours are also watching the development of the UBS case and are hoping cooperation with the U.S. authorities will set a precedent.

“I would expect that similar requests from EU member states would by no means be treated differently,” said a spokeswoman for EU Tax Commissioner Laszlo Kovacs.

Kenneth Farrugia, General Manager of Valetta Fund Services in Malta, which caters to onshore and offshore clients, said the U.S. investigation had ramifications far beyond UBS.

“UBS is not reliant on investors from the U.S., or even on private banking. The stability of UBS is not in question,” he said. “The question is how will this affect U.S. customers of other Swiss banks?”

UBS shares rallied on Thursday on hopes the settlement would end uncertainty hanging over the company. UBS has written down more toxic assets than any other European bank during the credit crisis, prompting clients to loose confidence and withdraw billions of dollars.