* Concerns about stability of banks, economy
* Low interest rates have helped property market boom
* Most mortgages held by smaller Swiss banks
* Fear of repeat of burst property bubble seen in early 1990s (Adds details, reaction, analyst comment)
By Emma Thomasson
ZURICH, Feb 13 (Reuters) - The Swiss government announced steps on Wednesday to try to dampen a housing market boom that has been fuelled by ultra-low interest rates, immigration and Switzerland's appeal as a safe-haven for financial investors.
The government said it is demanding banks hold additional capital against their mortgage books to restrain an "excessive" rise in real estate prices and "exorbitant" mortgage debt because the central bank could not lift interest rates due to its desire to keep a lid on the strong Swiss franc.
"Mortgage volume in relation to income has already reached levels which, not just historically, but also in the context of international standards, can be regarded as risky," the government said in a statement.
The bulk of Swiss home mortgages are held by the country's smaller banks, rather than the dominant UBS and Credit Suisse, which are already subject to strict capital rules imposed after the financial crisis.
"For smaller banks doing this kind of lending the impact is much larger. Even so, growth rates in mortgage lending have come down after banks were told to be more cautious in lending," said ZKB analyst Andreas Vendetti.
The move may hamper consumer sentiment in Switzerland, and by extension economic growth, by capping house prices and may also discourage inflows of speculative capital to take advantage of the bubble. The franc fell to 1.2377 per euro at 1145 GMT in response. Swiss bank stocks also slipped.
The Swiss Bankers Association said in a statement it regretted the decision, adding the capital buffer could have unintended adverse effects such as prompting banks to increase lending costs to businesses rather than dampening house prices.
The Swiss National Bank has had its hands tied as the bubble has built, forced to keep interest rates at rock bottom to hold down the franc, which had soared since the financial crisis as investors sought shelter from the troubles of the euro zone.
Norway - another traditional safe haven - recently asked its banking regulator to set bigger minimum capital buffers sometime this year on lenders' mortgage accounts to try and cool its real estate market after rising immigration and a booming economy pushed prices to record highs in 2012.
Despite a deep recession following the start of the financial crisis, a shrinking banking industry and the risks posed to growth by the strong franc, the Swiss economy remains in robust shape compared to many peers, with unemployment hovering around 3 percent and a high rate of immigration.
Swiss real estate prices and home mortgage loans have grown on average about 20 percent since 2008, but the rise has been much stronger in and around cities like Geneva, where prices have jumped 11 percent a year since 2007, and Zurich, where prices have risen an average of 8 percent a year.
While that increase pales in comparison to increases of over 100 percent in Spain and 300 percent in Ireland before the 2008 crash, Switzerland is fearful of a repeat of a real estate collapse in the 1990s that dented growth and hurt banks.
The government action comes as the result of a request from the SNB, which has repeatedly warned of overheating home prices.
"These imbalances intensified further during the second half of 2012, reaching levels that pose a risk to the stability of the banking sector, and hence to the Swiss economy," the SNB said in a statement on Wednesday, adding it will regularly reassess whether it needs to adjust the buffer or deactivate it.
Lenders will have to hold an extra equity capital of 1 percent of the risk-weighted assets in their mortgage portfolio by Sept. 30, which Serge Gaillard, finance department director, said meant they needed to raise a total of 3 billion francs.
The SNB can impose a capital buffer of up to 2.5 percent.
Last year, Swiss regulator FINMA enacted rules on banks to rein in risky lending but they have done little so far to slow the boom, with a real estate bubble index published by UBS jumping further into the risk zone in the fourth quarter.
UBS economists said the recent recovery in financial markets and the lessening appeal of safe havens like Switzerland could slow down the real estate boom in the current quarter.
"The majority of the demand, however, is domestic, which means that without a significant increase in long-term interest rates, the trend is unlikely to be reversed," they said.
Last year, ratings agency Standard & Poors downgraded its outlook on nine Swiss banks with big mortgage books, among them Basler Kantonalbank and Zuercher Kantonalbank, citing real estate market imbalances. (Additional reporting by Caroline Copley; editing by Patrick Graham)