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

UBS, the world’s biggest banker to the rich, led the fall in Swiss bank shares. It was down 12.5 percent at 10:14 a.m. EDT after hitting a fresh all-time low at 10.54 Swiss francs.

Shares in rivals Credit Suisse and Julius Baer, both large players in the private banking industry which has thrived thanks to Swiss bank privacy laws, were down 9 and 10 percent respectively.

Swiss banks were underperforming a fall in the DJ Stoxx index of European banks, which was down 5.4 percent. Bank worries also hit the Swiss franc, down almost 1 percent against the dollar and 0.6 percent against the euro.

Crisis-hit UBS late on Wednesday settled U.S. criminal charges that it had helped rich Americans to dodge taxes. But U.S. tax authorities said on Thursday they were still pursuing a civil lawsuit seeking to access details of 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 center has been tarnished by the fault of a single banking institution,” he said. “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 to let UBS hand over data to avoid U.S. criminal charges which could have threatened the bank’s existence and hurt the Swiss economy, heavily dependent on the banking industry.

“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 who are under U.S. investigation, told Reuters.

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

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

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 Alpine state the world’s biggest offshore center. Other havens include Liechtenstein, Bermuda and Singapore.

A U.S. flag flutters in front of the UBS building on Park Avenue in New York, February 19, 2009. REUTERS/Chip East

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

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 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 neighbors are also watching the development of the UBS case and are hoping that 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 for 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 had rallied on Thursday on hopes the settlement would end uncertainties hanging over the company, which 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.