Shares in UBS soared on Monday after reports said the Swiss bank would not pay a fine and would pass on fewer client names than expected in a settlement of U.S. tax litigation to be finalized later this week.

The U.S. government and UBS struck a deal in principle on Friday to end tax litigation against the Swiss wealth management giant, heading off a showdown that had threatened to sour relationships between the two countries.

A U.S. government source told Reuters on Friday he expected UBS not to pay a fine as part of the deal and Swiss newspapers reported the settlement would include the bank handing over 5,000 names of U.S. clients holding secret Swiss accounts -- about 10 percent of the names Washington was after.

A Swiss newspaper had reported that as many as 10,000 names of UBS clients could be transferred to U.S. tax authorities.

At first sight, this looks a good deal for UBS, considering speculation UBS would pay a fine of 2-5 billion Swiss francs and hand over many more names, said Helvea analyst Peter Thorne.

The deal will not formally violate Swiss bank secrecy rules, though these are already weakening as pressure to open up from the Group of 20 rich and major developing countries mounts on Switzerland and other offshore financial centers.

If UBS does not have to pay a fine, this would clearly be positive for the stock price. But we still do not know if this will be the outcome, said WestLB analyst Georg Kanders.

As far as the names are concerned, this would be a compromise. It will probably hurt their business with U.S. clients, but this business is pretty much dead already.

Absence of a fine would remove the risk of UBS having to raise more capital, having already received state aid and tapped the market for cash to weather the crisis, analysts said.

Shares in UBS were up 5.8 percent at 16.52 Swiss francs at 1155 GMT after rallying nearly 7 percent rally on Friday. UBS was the best-performing stock in the DJ Stoxx European banking index <.SX7P>, which was up 3 percent.

NAMES IN THE FRAME

Analysts said the handing over of some 5,000 client names would further dent already weakened Swiss bank secrecy laws and could put pressure on Swiss banking in general by forcing it to rely less on privacy and become more competitive globally.

Yvan Pictet, a senior partner at Swiss private bank Pictet & Cie and president of the Geneva Place Financiere foundation, said in an interview with Swiss television on Sunday that the Geneva-based financial industry was at risk from the deal.

Switzerland's top diplomat Michael Ambuehl, who led Swiss negotiations in the tax row, told newspaper NZZ am Sonntag the deal would not violate Swiss law.

The Swiss legal system is maintained, because the U.S. have promised to act on the basis of the current agreements and to ask for legal assistance again, said Ambuehl, who is state secretary in the foreign ministry.

Swiss law allows for the transferring of bank client data in specific cases of tax fraud, but the country had never faced such a broad-ranging request like the U.S. one. Other countries could use the same route to obtain taxpayers' data.

UBS is expected to report a second-quarter net loss of 1.1 billion Swiss franc ($1 billion) on Tuesday, along with billions of francs of wealthy clients outflows which had accelerated after the UBS handed over about 250 names in February to settle a separate criminal probe.

The main sticking point in the tax row was that Washington wanted UBS to disclose the names of 52,000 American clients suspected of using Swiss secret accounts to dodge taxes.

The parties still have to work out details, which are expected by Friday, when a new pre-trial status conference is scheduled. The court trial against UBS has been reset for August 10, but would be called off if a final deal is signed.

This has not removed all problems. But this is in any case a first positive step to win back client confidence, ZKB analysts said in a note.

(Additional reporting by Pascal Schmuck, editing by Mike Peacock)

($1=1.070 Swiss Franc)

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