UPDATE 2-French budget minister in tax fraud probe resigns
* French prosecutors investigating minister for tax fraud
* Jerome Cahuzac replaced by Europe Min Bernard Cazeneuve (Adds quotes, background)
PARIS, March 19 (Reuters) - French Budget Minister Jerome Cahuzac has resigned his post after being targeted in a tax fraud inquiry, the president's office said on Tuesday.
The announcement - a major embarrassment for President Francois Hollande's government - came hours after French prosecutors opened a formal investigation into allegations that the junior minister held a secret bank account in Switzerland.
The fall of a wealthy minister in such circumstances is awkward for the Socialist Hollande, who rose to power vowing to make the rich pay more taxes and is struggling to lift a popularity score at his lowest since his election last May.
But Cahuzac's rapid resignation - the first under Hollande - is likely to have little impact on policy or bond yields as the government has already dropped its goal of bringing the public deficit down to 3 percent of economic growth this year.
Cahuzac, who is leading a government crackdown on tax evasion, has repeatedly denied a report in December by French investigative news website Mediapart that he held an undisclosed account at the Swiss bank UBS until the start of 2010.
"This changes nothing with respect to my innocence or the libellous nature of accusations levied against me, and from now on I shall devote all my energy to proving that," Cahuzac said in a brief statement.
The brief presidency statement said the move came at Cahuzac's own request. It named Europe Minister Bernard Cazeneuve as his successor.
Earlier, the public prosecutor said police laboratory tests showed a correlation between the voice of Cahuzac and one heard in a recording of a telephone call published by Mediapart, in which a male voice acknowledges holding an account at UBS.
"In other words, the result of our analysis reinforces the hypothesis that Jerome Cahuzac is the unidentified speaker," the Paris prosecutor's office said in a statement.
Yields on French 10-year bonds were little changed after the announcement.
French prosecutors opened a preliminary investigation into the affair in January, but this step takes the inquiry to a new level and will involve deploying greater resources to the case and cooperation with other judiciaries, notably in Switzerland.
It will sharpen judicial scrutiny of Cahuzac, a former plastic surgeon and amateur boxer who gained a reputation for his acid-tongued stands in parliament attacking conservative predecessors as fiscally incompetent.
Personally wealthy thanks to a profitable hair-implant facility he ran with his wife, Cahuzac turned to politics in the late 1980s and became known as the toughest budget-watcher in the Socialist Party.
In government, he spearheaded a crackdown on tax evasion and fraud that prompted public shaming of figures like actor Gerard Depardieu, on top of his role as a "scalpel" paring down France's huge public-spending bill.
His resignation comes at a sensitive time for Hollande's government as it undertakes a process of redrafting deficit reduction plans vital to maintaining fiscal credibility with France's euro zone partners.
Weaker-than-expected growth forced the government to abandon Hollande's pledge to cut the public deficit to an EU-imposed ceiling of 3 percent of economic output this year, tumbling a key pillar of Cahuzac's fiscal policy.
His replacement, Cazeneuve, is familiar with the inner workings of Brussels as Europe Minister. That could help Finance Minister Pierre Moscovici as he tries to convince the European Commission and other euro zone countries that France should get more time to meet its deficit target. (Reporting By Nicholas Vinocur, additional reporting by Leigh Thomas; Editing by Mark John and Michael Roddy)