In a move which stunned and delighted critics, President Arnold Koller said the country should set up the fund "to do some good to those who endured unspeakable sufferings 50 years ago". Only two months ago, the then Swiss president, Jean-Pascal Delamuraz, condemned Jewish lobbying as "blackmail" and said claims for a compensation fund would be an "admission of guilt".
But with threats that Swiss businesses would be boycotted unless the question of "lost" Jewish bank accounts and war-time gold dealing was addressed, politicians and diplomats have been forced to meet the growing crisis head-on.
President Koller told a special session of parliament that the government intended to use a new, more realistic valuation of Swiss gold holdings as the basis for the fund.
With sound investment, the Swiss Foundation for Solidarity could enjoy an income of up to several hundred million pounds a year.
The fund would "reinforce Switzerland's humanitarian tradition and prove our gratitude for having been spared during two world wars," he said.
It would help not only Holocaust survivors but "victims of poverty and catastrophes, of genocide and other severe breaches of human rights".
The Swiss National Bank said gold would be sold over 10 years to fund the scheme, while avoiding hitting the world gold market. The gold price nevertheless dropped about $4 (pounds 2.50) an ounce to $354 (pounds 221).
Switzerland has been under growing pressure since newly released documents indicated it had not always helped Nazi victims and their families trace money placed in Switzerland before the Second World War. It also faced criticism for using its neutrality in the conflict to deal tons of Nazi gold.
Mr Koller admitted that the Swiss government initially underestimated the criticism and had failed to address it with "sufficient sensitivity".
Now, the new fund, to be established by next year to mark the 150th anniversary of the modern Swiss constitution, will supplement a humanitarian fund already endowed with pounds 43m by leading Swiss banks. The Swiss National Bank said yesterday that it would match the other banks' donation.
The British Labour MP Greville Janner, chair of the Holocaust Educational Trust, said he was delighted.
He described the move as an "honourable pre-emptive strike," because Switzerland knew it would face severe criticism from its own historical inquiry and from an American inquiry on Swiss financial dealings by Ambassador Eizenstat which reports later this month.
"They don't want to be the pariahs of Europe, therefore they have proposed to do what is right and set up this fund.
"It's very pleasant. It's another melting of the glacier."
An Israeli government spokesman Avraham Burg said: "I think it is a very important and significant step in the right direction. It is not the end of the trip."
Peter Feldmajer, leader of the Jewish community in Hungary, which has also voted to set aside pounds 15m for Holocaust survivors, said the offer was "approximately what had been taken from European Jewry".
However, the Swiss proposal requires parliamentary approval and will face opposition. One right-winger, Christoph Blocher, said the government had "lost its head". Many older Swiss have found it difficult to accept criticism.
Rolf Bloch, president of the Swiss Federation of Jewish Communities, said he was delighted but the "huge amount" of money would upset some people. "We have to convince the Swiss people it is the right thing to do".
Argentina has become the latest country to act on the question of Nazi gold. President Carlos Menem has ordered his central bank archives to be opened to investigate whether Nazi funds were deposited.Reuse content