Feb. 18 (Bloomberg) -- German Chancellor Angela Merkel said Liechtenstein should increase transparency in banks and other financial institutions, as police widened a probe into German residents accused of illegally funneling money to the alpine tax haven.

Merkel, who is scheduled to meet with Liechtenstein's Prime Minister Otmar Hasler in Berlin in two days, said she will raise the matter of how to regulate holdings in banks and foundations to build on previous measures taken by the authorities.

``There are matters that in our opinion still have to be addressed, and I will discuss those'' with Hasler, Merkel told reporters in Berlin today. Past steps ``give me courage we can clarify the remaining issues,'' she said. ``It's important that monies generated abroad are taxed properly in Germany.''

Merkel spoke as homes and business were searched in and around Frankfurt, Munich, Hamburg and Ulm today as part of an investigation by German prosecutors into possible tax evasion, Handelsblatt newspaper reported on its Web site, citing unidentified people close to the investigation. Prosecutors in the western city of Bochum, who are leading the nationwide operation, declined to comment on the searches.

Prosecutors said Feb. 15 they are investigating hundreds of people over tax evasion in connection with a raid the previous day on the Cologne home of Deutsche Post AG Chief Executive Officer Klaus Zumwinkel. Zumwinkel, 64, resigned as prosecutors probed allegations he evaded 1 million euros ($1.5 million) in taxes by transferring money to Liechtenstein.

Liechtenstein Bank Trading

Liechtensteinische Landesbank AG, the principality's oldest bank, dropped the most on record in Swiss trading after a separate case involving three men suspected of using stolen client records to blackmail the bank were arrested in Germany. Rival Liechtenstein bank VP Bank Group also declined as the arrests and the probe into tax evasion raised concern about the principality's ability to attract assets.

Police in Germany plan to execute some 900 court-ordered search warrants, beginning with an initial round of 125 searches of private homes at a rate of 20 to 25 a day, the newspaper Sueddeutsche Zeitung reported today, citing people close to the investigation.

Those under investigation are suspected of transferring wealth to Liechtenstein -- an alpine state with a population of 35,000 -- to evade higher taxes in Europe's largest economy, a criminal offense in Germany.

As much as 3.4 billion euros in revenue to the state could have been lost through the tax evasion measures, according to Sueddeutsche Zeitung.

`Significant Restrictions'

Liechtenstein is listed by the Paris-based Organization for Economic Co-operation and Development as among the ``offshore financial centers'' in which ``significant restrictions on access to bank information for tax purposes remain.''

``It's simply unacceptable to have tax havens in Europe that encourage capital flight and incite tax fraud,'' Ronald Pofalla, general secretary of Merkel's ruling Christian Democratic Union, told a Berlin news conference today. ``We must ensure that such refuges are shut.''

Bernd Bieniossek, the Bochum prosecutor who specializes in fiscal matters, said his office may give details of the investigation at a press conference this week or next.

``This news doesn't make us happy at all, but I think that we will soon return to a pragmatism that will allow us to resolve these difficulties,'' Liechtenstein's ambassador to Germany, Prince Stefan von und zu Lichtenstein, said today in comments broadcast on German N24 television.

Steinbrueck, Schaeuble

Hasler, who arrives in Berlin tomorrow, is scheduled to hold separate meetings with Finance Minister Peer Steinbrueck and Interior Minister Wolfgang Schaeuble.

Germany's Federal Intelligence Service, or BND, received an ``unsolicited'' offer by an unidentified informant of information that led to the raids, Ulrich Wilhelm, chief government spokesman, told reporters in Berlin today. The government paid as much as 5 million euros for a disk on which data was stored, Finance Ministry spokesman Torsten Albig said at the same press conference.

The ministry had ``no doubt'' about the legality of paying for possibly stolen data and that sample tests showed 80 percent of those who appeared on the disk had ``forgotten'' to declare Liechtenstein holdings to tax authorities, Albig said.

German intelligence has been conducting espionage operations in the principality since the beginning of the decade and has cultivated high-level sources in Liechtenstein banks, Berliner Zeitung newspaper said today, citing unidentified intelligence operatives.

The probe is based on a list of alleged tax-evaders for which Germany's intelligence service paid a former employee of LGT Group, the Liechtenstein wealth-management bank owned by the principality's ruling family, the Financial Times reported today, citing an unidentified person.

LGT Group said Feb. 15 that a connection between the tax investigation and client information stolen in 2002 hasn't yet ``conclusively been proven or confirmed.'' The data may have been passed on illegally after the former employee who stole the records was convicted, it said.

To contact the reporters on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net; Andreas Cremer in Berlin at acreamer@bloomberg.net.

Last Updated: February 18, 2008 11:50 EST