* Swiss city's trash unit became 'state within a state'
* Embarrassment for gleaming financial centre
* Investigation ongoing, no one yet charged
ZURICH, Sept 12 (Reuters) - Investigators in Zurich, ranked among the world's cleanest cities, are probing alleged grubby dealings within the municipal garbage and recycling department.
While trash services in the United States and Italy have sometimes been linked with illicit dealings, the Swiss financial centre appears an unlikely source of muck. Rubbish bins are ubiquitous, and a fleet of motorised street sweepers keeps boulevards nearly spotless.
But so far Zurich has unearthed irregular accounting surrounding some $15 million in cost overruns on one of its marquee projects, possible nepotism and an alleged off-the-books slush fund, according to a series of reports released last week.
"The garbage and recycling department in Zurich developed into a state within a state," Filippo Leutenegger, a city council member who has overseen the Sanitation and Recycling office since 2014, told state broadcaster SRF.
"We cannot allow that to happen," he added, rejecting criticism he failed to act quickly enough to halt the problems.
The department's chief, Urs Pauli, was fired in June after revelations he was driving a taxpayer-funded BMW sedan worth more than $100,000 and after a so-called "secret stash" of 215,000 Swiss francs ($226,500) was uncovered in his offices.
The city prosecutor's office seized the cash, which Swiss newspaper Tages-Anzeiger has reported resulted from selling used department vehicles and was used to reward employees for good performance.
According to the city's reports, the garbage department hid 15 million Swiss francs in cost overruns on a logistics centre, including by booking them to unrelated accounts in a "sweeping cover-up."
A whistleblower alerted authorities in 2015, accusing Pauli's department of neglecting proper documentation as well as irregularities on no-bid construction contracts involving firms with close ties to trash department officials.
"Awarding contracts without seeking bids or ensuring transparency can prompt questions about compliance when the same contractors are always chosen," according to the city reports. "It creates fertile ground for accusations of favouritism."
Earlier this year, Leutenegger filed a criminal complaint with city prosecutors, alleging Pauli, who had led the department since 2008, had broken the law by bypassing formal approval for his BMW.
Zurich prosecutors did not immediately respond to questions on Tuesday about their investigation's status. Nobody has been charged.
Pauli, who has denied wrongdoing, declined to comment this week through his attorney.
($1 = 0.9490 Swiss francs) (Editing by Mark Trevelyan)