Oct. 10 (Bloomberg) -- Libya said it will withdraw $7 billion from Swiss bank accounts and halt oil shipments to Switzerland in an escalation of a diplomatic dispute over the July arrest of Libyan leader Muammar Qaddafi's youngest son.

``All forms of economic cooperation with Switzerland will stop until the motives of this bad treatment are made clear,'' the state news agency JANA reported, citing an unidentified foreign ministry spokesman.

Libya wants Switzerland to apologize for the arrest of Hannibal Qaddafi, the Swiss newspaper 24 Heures said yesterday. Switzerland has called on Libya to allow two nationals to leave the North African nation. The two were arrested in July on charges of breaking immigration laws and released from jail but not allowed to leave the country.

Rolf Hartl, the director of the Swiss Petroleum Union in Zurich, said the Libyan oil embargo would only punish Tamoil SA, an oil refiner and distributor in the Alpine nation that's fully owned by the Libyan government.

``The whole of Tamoil's business in Switzerland is at risk'' as the company's Collombey refinery, and its 323 filling stations depend on Libyan crude supplies, he said in an interview yesterday. Switzerland has enough time to find alternative suppliers, according to Hartl.

Libya supplies approximately 20 percent of Switzerland's annual oil demand.

Tensions between the two countries increased in late July when Libya ordered Swiss companies to close offices in the country. Libya's state-run oil tanker company said July 24 it would stop carrying oil destined for Switzerland, though it later backtracked on the threat.

Hannibal Qaddafi and his wife were arrested in a Geneva hotel on July 15 after two of their employees filed a complaint accusing them of mistreatment. The couple were detained for two days, then allowed to return to Libya. The servants dropped their charges last month.

To contact the reporter on this story: Maher Chmaytelli in Athens at mchmaytelli@bloomberg.net.

Last Updated: October 10, 2008 05:36 EDT