Apr.02, 2010, 10:32:09 AM GMT

FRANKFURT, April 1 (Reuters) - German market regulator BaFin is investigating whether UBS's German operations adhered to money-laundering rules, BaFin said, adding to the Swiss bank's woes as investigators hunt for untaxed wealth.

The German watchdog began the probe -- related to a separate investigation by Frankfurt prosecutors into allegations by a former UBS client -- in mid-March, a spokesman said on Thursday, declining to comment further.

"We confirm that BaFin has initiated a special probe in connection with the issues raised by Peter S. UBS Germany is of course cooperating with BaFin," UBS Germany said in a statement, referring to the former client.

Frankfurt prosecutors are looking into suspected fraud, breach of fiduciary trust and tax evasion at the German arm of Switzerland's biggest bank.

German market regulators have responsibility for monitoring banks' adherence to market rules such as money laundering regulations, while German prosecutors have responsibility for pursuing individual cases such as tax evasion.

The probes come hot on the heels of a widespread international crackdown on tax evasion against Swiss banks spearheaded by Germany and the United States.

The Swiss government is preparing to hand over the names of UBS clients suspected of hiding funds from U.S. tax authorities.

German authorities have launched 1,100 tax evasion probes against Credit Suisse clients and are investigating whether the number two Swiss bank's staff abetted tax evasion.

Frankfurt prosecutors could not be reached for comment.

When the prosecutor investigation emerged in February, UBS said "the case in Germany has been in process since 2008. UBS Germany rejects the client's previous demand for the return of his investment losses.

"UBS has opened an internal investigation into the additional accusations about tax questions and domicile and will review the events of that time. Should these accusations be proven true, the new leadership of UBS will take appropriate measures," the bank said at the time.

Germany has been particularly aggressive in its pursuit of tax evaders.

In 2008, Germany bought data stolen from Liechtenstein's top bank, LGT. Former Deutsche Post Chief Executive Klaus Zumwinkel's Liechtenstein trust was uncovered in that data and he admitted to tax evasion in a spectacular case.

Germany's willingness to buy stolen bank data has shaken Switzerland's large private banking industry and stirred emotions in both countries. Germans hold an estimated 200 billion euros in undeclared funds in Switzerland.