* France probing UBS over allegations it aided tax evasion
* France demanded 1.1 bln euro guarantee payment from UBS
* UBS says payment unprecedented and unwarranted (Adds comment from source on negotiations between Paris prosecutors and UBS)
By Chine Labbé
PARIS/ZURICH, July 24 A 1.1 billion euro ($1.5 billion) guarantee payment demanded by French judges of Swiss bank UBS reflects the size of the fine it could pay if found guilty of helping wealthy French customers avoid tax, the French prosecutor's office said on Thursday.
In a major escalation of a 15-month inquiry, the Zurich-based bank was put under formal investigation on Wednesday on allegations it laundered the proceeds of tax evasion and was ordered to make what it called an "unprecedented and unwarranted" guarantee payment.
France's Socialist government has taken a tough stance on tax evasion and has recovered just over 1 billion euros so far this year from taxpayers coming clean on their hidden assets, of which 80 percent are in Switzerland.
A $9 billion fine levied by U.S. officials against BNP Paribas for sanctions violations earlier this month - a stinging rebuke for the grand dame of French banking - appears to have complicated UBS's settlement talks, taking place at the same time.
French officials feared a backlash if they settled with UBS for a "paltry" sum of less than 100 million euros, which had been on the negotiating table until BNP's fine emerged, a source familiar with the matter told Reuters.
However, French officials denied that version of events. A Finance Ministry source told Reuters the government had refused all approaches to negotiate an out-of-court settlement.
Authorities in France, one of the few countries to levy deposit guarantees from corporations in criminal cases, defended the surety for UBS, which is also in the crosshairs in Germany and Belgium for how it dealt with wealthy clients and tax.
"It was by assessing the fine that is potentially applicable that the level of the surety was fixed," an official in the prosecutor's office said, adding that if guilty, UBS would pay a fine equivalent to half the value of the transactions involved.
UBS has already paid a much smaller 2.875 million euro guarantee in the case. The official said UBS would now have to make up the difference to 1.1 billion euros by Sept. 30, and in one single transfer.
In a statement on Wednesday, UBS said it considered the legal basis and calculation for the sum to be "deeply flawed" and announced it would appeal.
The Swiss bank was fined $780 million for helping wealthy U.S. citizens avoid taxes in 2009.
French investigating judges suspect UBS regularly helped wealthy French clients avoid tax during the period from 2004 to 2012 and opened an inquiry into the activities of the bank and its French unit in April 2013.
The alleged sales practices in question involved seeking out wealthy customers in France who would be interested in opening bank accounts inaccessible to French tax authorities.
Three former and current executives with UBS' French subsidiary were also individually placed under investigation, a spokesman at the subsidiary said on Wednesday.
"In the course of the last few years, we have done everything we can to bring this matter to a close. We have also taken significant and broad steps to ensure tax compliance of our clients and will continue to do so," UBS said.
Switzerland effectively ended Swiss banking secrecy in May by agreeing to join other countries in sharing tax information once that is established as an international standard.
Cooperation efforts between Paris and Switzerland have been complicated by a long-running dispute over inheritance tax for wealthy French citizens in Switzerland. (Reporting by Chine Labbe and Yann Le Guernigou in Paris and Katharina Bart in Zurich; Writing by Mark John; Editing by Andrew Callus and Mark Potter)