* French government dealt severe blow by minister's lie
* Swiss account scandal first graft affair for Hollande
* Hollande insists Cahuzac deceived government to the end
By Catherine Bremer
PARIS, April 3 (Reuters) - The French government on Wednesday fought to limit the damage from a former minister's admission that he had lied over the existence of a foreign bank account, as critics suggested it had been either naive or complicit.
President Francois Hollande, already battling to convince the world he has France's finances under control, said he had never protected Jerome Cahuzac, his budget minister until mid-March, and personally ordered him to quit the moment an inquiry was opened into the affair.
Ending months of denials, Cahuzac admitted on Tuesday to having an undeclared foreign account and was placed under formal investigation for fraud.
The scandal is a grave blow to Hollande as the first sleaze scandal to hit a 10-month-old government he had promised would be irreproachable. The man in charge of France's budget had a foreign bank account he hid from the tax authorities and then lied about for four months.
The affair looked set to leave a deeper stain on the ruling Socialist Party than the 2011 arrest of its onetime presidential hopeful, Dominique Strauss-Kahn, in a sex assault case.
"Jerome Cahuzac did not benefit from any protection, other than the presumption of innocence," Hollande said, as French media raged that the minister had deceived the nation so long.
"What has happened is a shock because it's a lapse in Republican morals," Hollande said in a brief televised speech.
Media coverage of Cahuzac's admission of guilt, two weeks after he resigned his post and nearly four months after he made an earnest plea to parliament of his innocence, was merciless.
Le Monde daily said he had dropped a bomb that had shaken Hollande's authority. The left-leaning Liberation ran one word, "Shameful", over a front-page photo of Cahuzac looking sheepish.
Right-wing media compared the affair with France's biggest sleaze scandals and ranked him alongside former U.S. presidents Richard Nixon and Bill Clinton for public fibbing.
Jean-Francois Cope, head of the conservative party ousted from power last May, said Hollande had either been in the dark, suggesting a high level of naivety, or had known all along.
Asked why the government took Cahuzac at his word when he denied the existence of a Swiss account in December and did not make checks, ministers agreed public confidence would suffer.
"It's devastating for public life," Foreign Minister Laurent Fabius told BFM television. "What is awful is to ask oneself what confidence public opinion is going to have in politicians."
Hollande is already grappling with crumbling approval ratings and diminished credibility with investors after rowing back on his growth and deficit-cutting goals for this year.
Cahuzac, a onetime plastic surgeon who used to run a hair implant clinic, was in charge of a crucial programme to slash public spending by 60 billion euros ($77.03 billion) by 2017.
Le Parisien cheekily ran a photo of him speaking in November before a podium slogan entitled: "The fight against tax fraud".
An amateur boxer who once slapped a disrespectful youth in the face during a political walkabout, he risks five years in prison and a 375,000-euro fine if charged and found guilty.
Socialist Party Secretary Harlem Desir said Cahuzac was no longer welcome in the party and advised him to give up his National Assembly seat for a southwestern constituency.
Government spokeswoman Najat Vallaud-Belkacem stressed that this was "a man, not an institution" that had lied. "Nobody is safe from finding a liar within their own family," she said.
The public, which already gives Hollande dismal ratings as low as 22 percent, may not be ready to forgive quickly.
"What shocks me is not so much that he had a bank account abroad but that he lied about it for so long and with so much conviction," said Socialist voter Thomas Desternes, 36.
Le Parisien quoted a friend of Cahuzac as saying he had agonised for days as it became clear his lie would be exposed.
His former colleagues insisted they had been kept in the dark until he dropped his bombshell, and felt betrayed.
"We worked side by side with the kind of professional and human relationship two people have who spend 17 hours a day combing through public finances," said Finance Minister Pierre Moscovici. "I put my trust in him and he did not respect it."
Moscovici's ministry asked the Swiss authorities in January to establish whether Cahuzac had an account at UBS, but did not ask about other banks. The response was negative.
French media has reported Cahuzac transferred a million euros from a UBS account to another Swiss bank, Reyl & Cie. That account was then closed in 2010 and its contents sent to a Reyl & Cie account in Singapore where half a million euros still sat.