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Merkel challenger stokes Swiss fears over banks, tax deal

* Steinbrueck might force tougher Merkel line on tax

* Swiss-German tax deal needs SPD support for approval

* Wild West rhetoric seen weighing on relations

* Steinbrueck might bend on tax deal to form coalition

By Emma Thomasson and Andrew Thompson

ZURICH, Oct 1 (Reuters) - Politicians and commentators in Switzerland are worried that the nomination of Peer Steinbrueck - a critic of Swiss banking secrecy - to challenge Angela Merkel in an election next year may foil a tax deal with Germany and fan anti-Swiss sentiment.

Germany's opposition Social Democrats (SPD) on Friday named Steinbrueck as their candidate for chancellor, prompting Swiss fears he may seek to rally support against a popular Merkel by campaigning against a tax deal she struck with Switzerland that the SPD sees as being too soft on tax dodgers.

"Merkel could be forced to take a harder line against Switzerland," said Pirmin Schwander, president of the right-wing Action for an Independent and Neutral Switzerland (AUNS), saying he did not expect Steinbrueck to win next year's German vote.

"No election can be won with the topic of taxes and criticising Switzerland," said Schwander whose movement has close ties with the Swiss People's Party (SVP), the largest party in the country's parliament.

Earlier this year, Merkel's government agreed a deal aimed at stopping Germans using secret Swiss accounts to evade taxes, but it needs approval from the upper house of parliament, which represents the states and where the government lacks a majority.

The agreement would require Swiss banks to levy a punitive charge on an estimated 150 billion euros in undeclared money held by Germans and to tax future income, with the proceeds passed on to Germany. The identity of account holders would remain secret however.

When finance minister in Merkel's grand coalition in 2009, Steinbrueck likened Germany's small southern neighbour to "Indians" running scared from the cavalry over a clampdown on tax havens. The remarks prompted a member of the Swiss parliament to compare him to the Nazis.

"SPD chancellor candidate is Steinbrueck - does Switzerland now have to protect its borders from the German cavalry?" the Zurich section of the right-wing SVP joked in a message on Twitter.

In a sign Steinbrueck is likely to keep up the Wild West rhetoric against Switzerland, he told a party rally on Saturday: "Sometimes I have the impression that we shouldn't just talk about them (the Swiss), we should also saddle them."

DIVIDED OPINION

Pirmin Bischof, a member of the Swiss Christian People's Party (CVP), said Steinbrueck's nomination would hurt ties.

"Once he called for the cavalry to ride out to bring Switzerland to reason. This is not the kind of relationship we wish," he told Reuters. "However, once elections are over, the campaign rhetoric surrounding the withholding tax will disappear and reason will return."

Speaking in Zurich to a business audience last month, Steinbrueck said federal states led by his SPD would not falter in their opposition to the tax deal, saying Switzerland would remain under international pressure over tax.

But Hans Geiger, a banking professor at Zurich University, said the SPD might still pass the deal this year.

"Given the choice between lifting its domestic profile and having billions of lost tax money transferred to them without lifting a finger, the SPD will choose to pass the withholding tax," he said.

Peter Bodenmann, former president of the Swiss Social Democrats (SP), said Steinbrueck might actually prove more conciliatory than some expect if he is forced to seek support from the liberal Free Democrats (FDP) to form a coalition.

Bodenmann said Steinbrueck was aware that many FDP voters had secret Swiss accounts and said he would try to revisit the deal to secure a "traffic light" coalition between the SPD, Greens and the FDP to shut out Merkel's Christian Democrats.

"Steinbrueck would cynically and quickly solve the Swiss tax problem in the interest of a 'traffic light' coalition," Bodenmann told Der Sonntag newspaper.

Martin Janssen, a professor of finance at Zurich University, said he expected the current Swiss tax deal to fail but ultimately be revived in the next two or three years.

"I don't think the emergence of Steinbrueck as a candidate is bad at all: he is intelligent and well educated, if a bit too direct in his comments, which is the best possible counterpart for negotiations," he said.

(Additional reporting by Katharina Bart in Frankfurt, Albert Schmieder in Zurich and Tom Kaeckenhoff in Muenster; Editing by Andrew Osborn)

((+41 58 306 7311)(Reuters Messaging: emma.thomasson.thomsonreuters.com@reuters.net))

Keywords: SWISS TAX/STEINBRUECK