Angela Merkel, German chancellor, on Wednesday threatened Liechtenstein with isolation in Europe unless the Alpine tax haven moved to ease bank secrecy, as bilateral tensions grew over Berlin’s handling of its spiralling tax evasion inquiry.

Ms Merkel, speaking in Berlin after a meeting with Otmar Hasler, Liechtenstein’s prime minister, accused the principality’s banks of “encouraging lawbreaking” in Germany by offering services allowing tax evasion.