Liechtenstein shook off the label of a money-laundering center after it hurriedly revised its banking laws seven years ago. Now the tiny Alpine principality is in trouble again, accused of being a haven for European tax evaders.

Liechtenstein shook off the label of a money-laundering center after it hurriedly revised its banking laws seven years ago. Now the tiny Alpine principality is in trouble again, accused of being a haven for European tax evaders.

This famously discreet bastion of gentility returned to the media glare when German investigators alleged that hundreds of wealthy Germans have been stashing away their money in Liechtenstein trusts, hiding behind banking secrecy laws to keep from paying taxes in Germany.

It's a touchy subject for a country of 35,000 people on a land area only double the size of Manhattan, nestled in the Alps between Austria and Switzerland.

A medieval castle towers over the glass-and-steel banks that line streets of the capital Vaduz - a contrast that underscores the speed with which Liechtenstein has developed since World War II, when it was still emerging from being a poor agricultural country.

Financial services have been a key factor in that transformation - bringing an influx of wealth to the German-speaking principality whose per capita income of CHF112,000 Swiss francs now ranks it among Europe's wealthiest countries.

Angel Gurria, secretary-general of the Paris-based Organization for Economic Cooperation and Development, said the basic issue is how to deal with countries whose banking secrecy helps them profit from tax dodging by residents of other countries.

''Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in the relations between democratic societies,'' Gurria said in a statement.

In Liechtenstein, the financial sector has been developing since the 1920s through close links with Switzerland - another country whose fabled secrecy in banking matters has attracted fortunes from around the world.

The OECD, a 30-member watchdog body, on Tuesday said Liechtenstein was among only three countries still on its black list of ''uncooperative tax havens'' - along with two other small European countries: Andorra and Monaco.

The four other countries that were on the black list in 2002 - Liberia, and the South Pacific Islands of Nauru, Vanuatu, and the Marshall Islands - have committed themselves to improving transparency, Gurria said.

Even earlier, other offshore banking centers had tightened their laws and had pledged to comply with OECD standards, including Caribbean islands, Guernsey and the Channel Islands.

Banks and other financial services go right to the core of Liechtenstein's economy, providing 14.3% of the work force and contributing 30% of the gross domestic product of CHF4.3 billion. The royal family owns the country's largest bank, which handles investments from clients around the globe.

Liechtenstein's ruling Prince Alois effectively has more powers than any other monarch in Europe, with sweeping rights that include dismissing governments and vetoing laws. The 39-year-old prince jumped into the fray Tuesday to defend his realm - saying Germany should get its own tax system under control.

German Chancellor Angela Merkel brushed aside the comments. ''I find that such theories ... are not sustainable, not right and not helpful for our relations,'' she said.

Merkel met on Wednesday with Liechtenstein Prime Minister Otmar Hasler and pressed for quick progress toward a European Union-Liechtenstein anti-fraud agreement.

''I would say that time is pressing - because the faster this happens, the better the foundation for good neighborly relations,'' she said.

Hasler said Liechtenstein ''is a modern financial center and we are also willing and ready to enter into cooperation.''

In a speech to parliament Thursday, Alois said Liechtenstein had more work to do on its finance laws and hinted that banking secrecy might have to be modified because of tax treaties so that ''perhaps it won't be so comprehensive as it is today.''

Germany's tax-evasion investigation, based on a CD-ROM of Liechtenstein bank client information obtained by German authorities, last week forced the resignation of one of Germany's most prominent managers, Deutsche Post chief executive Klaus Zumwinkel. This week tax inspectors have been conducting a string of raids across the country.

The key problem identified by German officials: private trusts opened in Liechtenstein that allegedly can be used for tax evasion.

Liechtenstein's government said Wednesday it was preparing a reform of laws governing such trusts, but noted that the changes have been planned since 2001 and had nothing to do with recent complaints from Berlin.

Merkel pointed to a Liechtenstein-US agreement which, she said, provides for taxation of the foundations.

''We say that what is possible with the United States ... should also be possible with the European Union,'' she said.

Liechtenstein Justice Minister Klaus Tschuetscher said Wednesday that the practice of allowing foreigners to open trusts in Liechtenstein anonymously by registering them through a local attorney or trustee is in line with international law.

He said the complaint that this encourages foreigners to use Liechtenstein trusts for tax evasion purposes was ''an absurd theory.''

After major countries cracked down on money laundering in the 1990s, Liechtenstein tightened its laws to keep out ill-gotten gains from foreign criminals and potentates. In 2001 the 26-nation Financial Action Task Force removed Liechtenstein from its money-laundering black list. But almost simultaneously the OECD included the country on its separate list of ''uncooperative tax havens.'' There it remains even though Liechtenstein maintains the classification is based on outdated information.

Financial analyst Andreas Venditti of the Zuercher Kantonalbank in Switzerland, said Liechtenstein's banks are suffering a blow to their reputation because of recent developments.

Claudia Meier, an analyst at Zurich-based private bank Vontobel, said: ''We expect that the tax affair will have negative effects on the business of the Liechtenstein banks,'' with German clients withdrawing assets and new investments declining.