Liechtenstein, said the Foreign Office's top mandarin Alexander Cadogan on the eve of World War Two, "is an historical curiosity and only exists by mistake".

In fact, he wrote in a 1939 memorandum as Nazi Germany absorbed two of the tiny Alpine principality's near neighbours and prepared for blitzkriegs to east and west in Europe, "it should not exist at all as an independent state".

But on July 12, Liechtenstein - 60 square miles of flood plain and mountain along the southern Rhine between Austria and Switzerland -marks the 200th anniversary of sovereignty as one of the world's most prosperous nations.

Despite reservations over the powers of its princely family voiced by the political freedom watchdog Council of Europe, national officials insist its future is closely tied to the continent's integration process.

"We are a minute part of Europe, but our heart beats with it," says Foreign Minister Rita Kleber-Beck.

For five years between 1939 and 1945, the then poor agricultural country of some 12,000 people and the last relic of the Holy Roman Empire, stood braced for a Nazi invasion and incorporation into Adolf Hitler's German Reich. The assault never came.

Not for the first time in its history at a contested continental crossroads, Liechtenstein survived a foreign threat, and emerged to build a modern economic and social system but with a monarchic political structure rooted in its past.

Today, with a native population of about 25,000 and another 10,000 foreign residents, it is - in its small way -a technological powerhouse and financial centre with global reach.

In a customs union with Switzerland and using the Swiss franc as its currency since 1923, Liechtenstein set itself apart from its big western neighbour by voting in 1992 to link up with the European Union through the European Economic Area (EEA). In a parallel referendum, a majority of the more eurosceptic Swiss rejected joining the EEA.

Two of Liechtenstein's dozens of home-grown companies

some started in barns and garages during the war -dominate much of the world market for construction industry power drills and artificial teeth.

Its banking sector was shaken in 1999 by a black-listing by the Paris-based Organisation for Economic Cooperation and Develop-ment rich nations' club over reluctance to join the global fight against money-laundering.

However, after radical reforms to tighten controls, it was removed from the list and by the end of last year its banks were managing a record £65.1 billion in foreign funds, while its international insurance business soared.

Presiding over the July 12 celebrations will be Hereditary Prince Alois, himself a banker and scion of an ancient Austrian noble family linked to the region since the 14th century, who officially "shares power with the people".

Liechtensteiners, in a 2003 referendum, gave a two-thirds majority to a new constitution allowing the prince to dismiss the government and veto legislation by the 25-seat parliament.

Prince Alois, aged 39, has been in charge since 2004 when his father Hans-Adam, still formally head of state, left for Vienna to focus on running the family banking business.

So how did the tiny principality manage to keep its separate identity?

"I think we were very lucky throughout our history that we had the right people in charge at the right time,"

Prince Alois said in the royal family's castle on the heights above Vaduz, the capital.

Certainly his ancestor Johan 1, a general in the Imperial Austrian army who fought Napoleon but then negotiated a peace that in 1806 established Liechtenstein's independence within a French-backed Rhine Confederation, was a skilled diplomat.

And his grandfather, Franz-Josef, though working against local Nazis, went to Berlin in 1939 to talk to Hitler - a visit local historian Peter Geiger says may have helped persuade the Nazi leader to leave the micro-country alone.

Another view is voiced by Michael Hilti, president of Liechtenstein's chamber of commerce and grandson of the founder of the company whose "red box" of high-tech tools can be seen on building sites around the globe.

"I think we survived over the centuries because we were so poor no one wanted us," he says. "Now, the world - and Liechtenstein - have changed."

Visitors to Vaduz, called "the village" by locals, can testify to changes in the capital long known for glum office blocks sheltering "letterbox" foreign companies and for shops selling the principality's colourful postage stamps.

Today glass-and-steel bank buildings designed by top modern architects look out on to a green park.

Contemporary sculptures line the pedestrianised main street in front of the medieval town hall, while the national parliament, the government headquarters and the castle above are getting a facelift.

The image the country displays to the outside world has had similar treatment, under the guidance of government spokeswoman Gerlinde Manz-Christ, a former Austrian diplomat.

"It was the shock caused by the 1999 blacklisting that set people thinking about how other nations see Liechtenstein," says Manz-Christ. "They realised that just keeping a low profile was not enough."

The result was the creation of a new brand for the country as an outward-looking nation determined to make its presence known on the world stage. ..SUPL: