UPDATE 5-Swiss draw line in the sand to cap runaway franc

* SNB to buy forex in unlimited quantities

* Franc tumbles 8.5 pct against euro after news

* Swiss politicians, business have backed SNB

* Interventions in 2010 led to record losses

* Success of target likely depends on euro zone crisis

(Adds Hildebrand comment)

By Emma Thomasson and Catherine Bosley

ZURICH, Sept 6 (Reuters) - The Swiss National Bank shocked
markets on Tuesday by setting an exchange rate cap on the
soaring franc to stave off a recession, discouraging investors
anxious about flagging global growth from using the currency as
a safe haven.

Using some of the strongest language from a central bank in
the modern era, the SNB said it would no longer tolerate an
exchange rate below 1.20 francs to the euro and would defend the
target by buying other currencies in unlimited quantities.

The move immediately knocked about 8 percent off the value
of the franc, which had soared by a third since the collapse of
Lehman Brothers in 2008 as investors used it as a safe haven
from the euro zone's debt crisis and stock market turmoil.

Analysts said the SNB should be able to defend 1.20 as it
can print unlimited francs but that long-term success depended
on efforts to deal with the euro zone's debt problems given the
relative strength of the Swiss economy and government finances.

"The current situation therefore acutely threatens our
economy and our labour market. It carries the risk of a
recession as well as deflationary developments," SNB Chairman
Philipp Hildebrand said.

"The SNB will enforce this minimum rate with the utmost
determination and is prepared to buy foreign currency in
unlimited quantities."

The move was seen as a new shot in the currency wars, with
Japan expected to try to weaken the yen if the Swiss action
diverts more safe-haven inflows into the currency. Gold, which
hit a record higher earlier on Tuesday, is also seen gaining.

Fears that the world economy may tip back into recession
have spurred investors to dump riskier assets such as stocks and
seek the relative safety of gold and the franc and yen.

"As the SNB's pockets are very deep, it should succeed in
stabilising the rate above 1.20," Commerzbank economist Ulrike
Rondorf said.

"On the other hand, a further depreciation of the franc
seems unlikely to us in the current climate. Uncertainty on the
market is still very high, with no sign of the debt crisis in
the euro zone abating at present," she said.

The SNB, which holds its quarterly monetary policy review on
Sept. 15, said that even at a rate of 1.20 to the euro, the
franc was still high and should continue to weaken over time.

"If the economic outlook and deflationary risks so require,
the SNB will take further measures," it said.
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Insider show, click on: link.reuters.com/bab63s
BREAKINGVIEWS column:
Graphic on move in EURCHF: link.reuters.com/mab63s
Graphic on Swiss exports: link.reuters.com/wug33s
Graphic on corporate results: link.reuters.com/xug33s
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The SNB has warned that economic growth -- already flagging
in the second quarter -- is set to slow sharply in the coming
months as the strong franc makes Swiss exports, from luxury
watches to drugs, prohibitively expensive.

The franc nearly touched parity with the
common currency on Aug. 9.

It dived 8.5 percent against the euro after Tuesday's
announcement to 1.203 francs at 1051 GMT and dropped almost 8
percent against the dollar to 0.848.

"That was the single largest foreign exchange move I have
ever seen," said World First chief economist Jeremy Cook. "This
dwarfs moves seen post Lehman Brothers, 7/7, and other major
geopolitical events in the past decade."

Swiss stocks, hurt of late by the strong franc, jumped, with
the blue-chip SMI index trading up 4.3 percent.

EURO ZONE DEVELOPMENTS KEY

"It will be the direction taken by the euro zone crisis that
will determine how successful the SNB will be in protecting the
Swiss franc from strength in the coming months," said Rabobank
senior currency strategist Jane Foley.

The SNB also set a formal exchange rate target in 1978 --
above 0.80 francs per German Mark -- when the franc was soaring
in the aftermath of an oil crisis, and successfully defended
that rate, but at the price of soaring inflation.

"It worked in the short term, but it came at an enormous
cost and led to a huge burst of inflation," said Simon Derrick,
head of currency research at Bank of New York Mellon.

"The move now should work in the short term, but in the long
term they are providing investors who are looking to exit the
euro zone debt crisis with an easy route."

The SNB move came just after data showed Swiss inflation
eased by more than expected in August, dipping 0.3 percent from
a month earlier, lower than a median forecast in a Reuters poll
for a fall of 0.1 percent.

The SNB temporarily managed to weaken the franc last month
after it cut an already low interest rate target to nil on Aug.
3 and boosted the amount of liquidity in the banking system. But
the currency jumped again last week as worries about the health
of the global economy intensified.

The SNB is seen in a strong position to follow through on
the new target after top Swiss politicians and business groups
expressed support for the central bank as the economy flags.

Such political solidarity is in contrast to earlier this
year when the central bank came under fire for running up a huge
loss in 2010 trying to keep a lid on the franc, prompting calls
for SNB chairman Philipp Hildebrand to resign.

"Political support for this measure is much higher now than
last year, given the extreme moves in the franc in recent
months. This likely implies a stronger commitment than during
the 2010 intervention," said Goldman Sachs forex research head
Thomas Stolper.

The SNB's forex holdings had already surged to 253.4 billion
francs in August as a result of foreign exchange swaps the SNB
launched to ease the franc.

Swiss Economy Minster Johann Schneider-Ammann, who has
proposed 870 million francs in government aid to counter the
impact of the franc, welcomed the SNB action: " "It has a
material impact and especially a psychological impact."

The strong franc has started to dampen exports, hurting
companies like speciality chemicals maker Clariant AG
which cut its 2011 sales target on Monday, while the tourism
sector is also suffering as foreign visitors stay away.

Hildebrand said the costs associated with capping the
soaring franc would be high, but it was necessary to stop the
currency's strength causing long-term damage to the economy.

"The strong national currency is presenting existential
problems not only to the export sector and tourism but the whole
Swiss economy," Gerold Buehrer, president of business lobby
group Economiesuisse, said in a statement.

"It is central that politicians and business stand united
behind the national bank."

The SNB step should also help economies in eastern Europe
with two-thirds of mortgages in Hungary and about half of
Poland's denominated in Swiss francs.

"This unusual step by the Swiss National Bank should be seen
positively," said UniCredit unit Bank Austria, the
leading lender in emerging Europe.

But it added: "For the holders of foreign currency loans
this is by no means the all-clear".

(Additional reporting by Katie Reid and Caroline Copley;
Editing by Hugh Lawson)