* Swiss image of itself as world's trusted banker tarnished
* Commentators denounce "humiliation", "capitulation"
By Stephanie Nebehay
GENEVA, Aug 21 (Reuters) - Switzerland's image of itself as the world's trusted banker and friend to all nations has been tarnished by a tough week in diplomacy.
Swiss commentators on Friday denounced as "humiliation" and "capitulation" decisions on two long-standing issues: to surrender its cherished banking secrecy in a U.S. case against UBS, and to apologise to Libya in a year-old dispute over the arrest of the son of Muammar Gaddafi.
Switzerland has not been under such stress since 1998 when it paid $1.25 billion compensation for Nazi-era Jewish accounts which had lain dormant in its banks since World War Two.
"Switzerland is a small country. In some things it punches above its weight, but in other things it has limited diplomatic power," Daniel Warner, a U.S. political scientist at Geneva's Graduate Institute of International Development Studies, told Reuters.
Switzerland prides itself on its neutrality and its reputation as a champion of human rights and conflict mediation.
While Washington is considered a close ally -- Swiss embassies represent U.S. interests in both Iran and Cuba -- Switzerland has made a point of keeping an independent stance.
For example Berne has stayed out of the 27-member European Union, its largest trading partner, fearing its 7.6 million citizens would lose their voice on issues including immigration.
But the wisdom of that position is questioned by some.
"It is not a member of NATO or the EU and has difficulty having allies who can exert pressure in certain kinds of situations to help it. At difficult moments, it has no allies to count on," said Warner.
"BOWING PAINFULLY LOW"
President Hans-Rudolf Merz went to Tripoli on an unannounced visit to apologise for the brief detention of Hannibal Gaddafi and his pregnant wife Aline, who were arrested in a Geneva hotel in July 2008 on charges of mistreating two domestic employees.
The couple had already reached a private settlement with their employees, who dropped charges, but Libya cut oil supplies, withdrew assets and detained two Swiss nationals.
Merz and Libyan Prime Minister Al-Baghdadi Ali Al-Mahmoudi said the countries had agreed on a "normalisation" of their relationship."
Days earlier, the veil was lifted on Swiss banking secrecy
when Berne agreed to reveal details of about 4,450 wealthy
American clients of its largest bank UBS
The 66-year-old Merz, who is also finance minister, has led efforts to restore the reputation of the world's biggest offshore banking centre by cooperating more on tax evasion.
Merz had barely touched down after his Libya trip when the U.S. Justice Department fired another salvo, indicting a Swiss banker and lawyer on charges of helping wealthy Americans hide their assets. [ID:nLL370481]
Geneva daily Le Temps, in a front-page editorial headlined "Surrender", said that in presenting its excuses to Tripoli and agreeing to international arbitration on the affair, Switzerland had been confronted with its "spectacular isolation".
"No other friendly country came to its rescue," it noted.
Commentator Stefan Boss, writing in the Basler Zeitung, said: "Merz has bowed painfully low with his apology for Hannibal's arrest. Whoever now criticises should also ask: would Gaddafi have been so inconsiderate with Switzerland if it was a member of the EU?"
A cartoon in Friday's Tribune de Geneve depicted Merz on the tarmac upon return from Tripoli, his trousers at his ankles.
"I didn't drop my trousers for Gaddafi, they were already down for the deal between UBS and the U.S.," the cartoon Merz says. (Additional reporting by Sam Cage in Zurich; editing by Sonya Hepinstall)