GENEVA - SWISS banking giant UBS said on Thursday it will return some 35 million dollars (S$48 million) to towns and cities in the US state of Massachusetts over investments disallowed under state law.

In a statement sent to reporters, the Swiss bank said: 'UBS has agreed to purchase, at par value, the principal investments of certain Massachusetts municipalities that invested in the ARS (auction rate securities) market.'

'The agreement addresses particular ARS transactions that were not permissible for these public entities' accounts under applicable law.'

The bank added that the case applies due to the particular circumstances of Massachusetts law and that it is 'pleased that the matter has been resolved.'

According to Massachusetts' attorney general Martha Coakley's office, investigations into allegations that UBS had misled towns, cities and state and municipal entities on whether ARS were a permissible investment for them began in February 2008.

'We appreciate that UBS has taken action to return the invested monies to our cities, towns and other government entities. In these tight financial times, Massachusetts municipalities need to have access to their monies and to invest them appropriately,' the attorney general said in a statement.

An auction rate security is a debt, such as a bond or stock, whose interest rate or dividend is reset during auctions.

Although the securities typically mature only in the long-term, they are traded at weekly or monthly auctions.

Such securities were previously viewed as safe investment vehicles but ARS auctions dried up in early 2008 due to the credit crisis in the United States.

'Auction rate security investments have been frozen since early this year due to lack of market liquidity and the value of many of the municipal investments have been written down by UBS,' the attorney general's office said.

Therefore, holders of such instruments have had to hang on to the securities in order to avoid losses.

'UBS's action on Thursday will allow these entities to recover these frozen funds.'

UBS, Switzerland's biggest bank, has had to write down over 37 billion dollars in bad investments since the subprime mortgage crisis in the US began, making it the worst-hit bank by the crisis so far.

This week, it posted first quarter losses of 11.54 billion Swiss francs. -- AFP