UPDATE 2-Latvian central bank chief suspended, says victim of smear campaign

(Updates with c.bank chief's suspension)

RIGA, Feb 20 (Reuters) - Latvia's central bank chief was suspended on Tuesday pending an investigation into whether he solicited a bribe, as corruption allegations rocked the financial sector in the Baltic country, a euro zone member with close ties to neighbouring Russia.

The prime minister's office said Ilmars Rimsevics had been suspended from his role as the anti-corruption agency investigates allegations he asked for a 100,000 euro bribe.

Rimsevics, who was held in custody over the weekend, had earlier told a news conference he was the victim of a smear campaign because he has been leading a drive to clean up corruption in the banking sector. He said he would not resign.

"I have not demanded or received any bribes," Rimsevics told the news conference. "I have become the target of some Latvian commercial banks to destroy Latvia's reputation."

Latvia's financial system has also been rocked in recent days by U.S. allegations that a leading bank engaged in money laundering and helped breach North Korean sanctions.

Prime Minister Maris Kucinskis said earlier on Tuesday that the complaint against Rimsevics was made by small Latvian lender Norvik Bank. Its Russian owner Grigory Guselnikov had not provided evidence of wrongdoing despite being "repeatedly asked", he added.

Norvik Bank did not immediately respond to a request for comment.

Kucinskis said he could not rule out that the bribery allegations against Rimsevics, no details of which have been given by police or the anti-corruption authority, were an attempt to damage the reputation of Latvian authorities.

It was not immediately clear whether Rimsevics could continue to represent Latvia on the European Central Bank's Governing Council, which sets interest rates for the euro zone.

A Bank of Latvia spokesman said deputy governor Zoja Razmusa would attend a non-policy ECB meeting on Wednesday.

The confusing rival claims of wrongdoing will deepen worries about the transparency of Latvia's banking sector, which has close financial links to former colonial master Russia.

The International Monetary Fund has repeatedly urged Latvia to be vigilant over non-resident deposits -- mostly held for clients in Russia and the CIS -- and strengthen the enforcement of rules to combat terrorism funding and money laundering.

A number of small banks have been punished in recent years over breaches of those rules.

This month, the U.S. Treasury said it was seeking to impose sanctions on Latvia's third-biggest lender, ABLV Bank, which it said had "institutionalized money laundering".

Norvik Bank was fined by Latvia's Financial and Capital Market Commission (FKTK) last year for failures that allowed clients to bust sanctions on North Korea.

European Commission Vice President Valdis Dombrovskis, a former Latvian prime minister, warned of reputational damage from the allegations of corruption and money-laundering.

"We are monitoring the situation closely," he said. "Of course we see that there is damage for reputation, first and foremost for Latvia, and we expect that the national enforcement authorities will address the issue swiftly." (Reporting by Gederts Gelzis; Additional reporting by Balazs Koranyi and John O'Donnell in Frankfurt; Writing by Simon Johnson; Editing by Catherine Evans)