Shares in UBS fell to their lowest level since July on Monday after the justice minister underscored the risk to the Swiss economy should the bank's settlement of a U.S. tax dispute unravel.

UBS settled a damaging tax row with the United States in August by agreeing to transfer data on 4,450 clients to U.S. tax authorities. But that deal is in question after a Swiss court ruled last month that most of the data cannot be transferred.

The threat that UBS could lose its license in the United States, and face collapse as a result, has hung over the bank since the tax dispute escalated at the start of 2009.

We know ... the Swiss economy and the job market would suffer on a major scale should UBS fail as a result of its license being revoked in the United States, Justice Minister Eveline Widmer-Schlumpf was quoted as saying in an interview with Swiss newspaper Le Matin Dimanche, published on Sunday.

The stability of UBS, which had to be rescued by the state in the middle of the financial crisis, is vital to Switzerland as the bank's liabilities are worth several times the country's gross domestic product.

Even though UBS has stabilized its financial situation by hugely reducing its balance sheet as well as risks, it needs to resolve the U.S. dispute to win back wealthy clients.

Shares in UBS, the world's second-largest wealth manager by assets, were down 0.9 percent at 13.89 Swiss francs at 1047 GMT (5:47 a.m. EST), recouping some earlier losses but underperforming a flat DJ Stoxx European banking index

Traders said that reports at the weekend that Germany was considering buying data of 1,500 possible tax evaders with bank accounts in Switzerland from an informant was also hitting the stock as investors feared that some could belong to UBS, Switzerland's biggest wealth manager.

DEADLOCK

UBS and the Swiss government had hoped to put U.S. accusations that the bank helped rich American dodge taxes firmly behind the bank when the case was settled in August.

But a Swiss administrative court ruling saying data belonging to a UBS client should not be transferred to the United States as this would break Swiss law has put the deal in jeopardy and is creating a massive legal headache for Berne.

Under the terms of the August deal, UBS could end the deadlock if at least 10,000 of its U.S. clients with secret Swiss accounts declare themselves to U.S. tax authorities.

But the IRS has so far declined to say how many of the nearly 15,000 taxpayers who have taken advantage of a U.S. tax amnesty are UBS customers.

We want to know how many of the 14,700 people who, after violating U.S. laws, turned themselves in to U.S. tax authorities, are clients of UBS, Widmer-Schlumpf said.

UBS is to report its annual results next week.

(Editing by Erica Billingham)

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