* Government may issue executive order
* Knotty legal challenges could lie ahead
* Central bank chairman urges government action
ZURICH, June 20 (Reuters) - The Swiss government is expected to make a last-ditch attempt to protect its banks from criminal charges in the United States by issuing an executive order allowing them to pass data to U.S. authorities.
After parliament blocked a bill that would have allowed the banks to sidestep strict secrecy laws, the government's seven-strong Federal Council will on Friday look for another way to facilitate the release of data.
Swiss privacy laws have helped to make the Alpine country the world's biggest offshore financial centre, but they have also drawn the ire of countries seeking to clamp down on tax evasion. Swiss banks have been the subject of investigations in Germany, France and the United States.
The refusal by parliament's lower house to debate the bill passed the buck back to the government, with lawmakers calling on ministers to find a solution to the long-running tax dispute.
Finance Minister Eveline Widmer-Schlumpf said on Wednesday that the government would do all in its power to find a solution, adding later that the Federal Council would make an executive order at its Friday sitting.
But such an order is no guarantee of swift action. Douglas Hornung, a Geneva-based lawyer representing bank employees worried about their data being passed to U.S. authorities, said that legal action by bank staff could tie up the authorities for years.
"In a recent case we managed to get a preliminary injunction preventing a bank from passing on an employee's data. We may be able to use that as a precedent," Hornung said.
The Swiss government passed an emergency measure to allow its biggest bank, UBS, to hand over 4,450 client names to U.S. authorities as part of a settlement that included a $780 million fine after it admitted to helping U.S. clients to dodge taxes.
In the case of UBS, the Swiss used powers to override its secrecy laws because the bank was considered to be of crucial importance to the country's financial system.
This time the government is expected to issue an order that complies with existing Swiss laws and is likely to refer to guidelines prepared by Swiss financial markets regulator FINMA, which lay out rules for bank dealings with foreign authorities.
Though banks looking to pass data under this framework could face legal opposition from employees, Geneva lawyer Hornung conceded that opposition is likely to be limited because such cases are costly to fight and Switzerland does not allow class action lawsuits by groups of plaintiffs.
The uncertainty of the situation weighed on the shares of Swiss banks on Thursday. Credit Suisse and Julius Baer shed 4.2 percent and 3.8 percent respectively, while Basler Kantonalbank fell 6 percent, against a 3.6 percent decline in the European banks index.
Those three are among about a dozen banks under formal investigation by U.S. authorities.
Earlier this year a U.S. indictment felled Switzerland's oldest private bank, Wegelin & Co. It paid a $58 million fine and closed its doors for good after pleading guilty to helping Americans evade taxes through secret accounts.
Swiss National Bank Chairman Thomas Jordan said on Thursday that Switzerland should take all measures to avoid more banks being indicted, while the Swiss Bankers Association warned of huge costs to the economy if the Federal Council fails to find a way for banks to meet the requirements of the U.S. programme.