The scandal has led to widespread speculation of a high-level connection to organised crime or even the setting up of a secret army.

The BBC's Imogen Foulkes: "The affair is the biggest fraud case involving the Swiss Government"

At a hastily arranged news conference on Sunday, the Swiss Defence Minister, Adolf Ogi, said the investigation into the fraud case had taken on new and undreamed of dimensions with the discovery near the capital, Berne, of an arms cache containing hundreds of weapons.

He said he had suspended military intelligence chief Peter Regli with immediate effect at his own request because Mr Regli "did not want to stand in the way of the Investigation."

Massive fraud

Mr Ogi said the arms discovery followed the arrest earlier this month of an accountant in the intelligence service, Dino Bellasi, who has been accused of embezzling over 8.5million Swiss francs ($5m) from the defence department.

BBC's Imogen Foulkes: Defence department officials are in shock

The scale of the fraud on its own would make it the largest of its kind in the history of the Swiss Government.

Secret army

One Sunday newspaper, Sonntagsblick, said Bellasi had links with the Serbian secret services and the arms were destined for a secret intervention force being created within the Swiss army.

But Mr Regli, who was also present at the news conference, denied the reports. "Bellasi has put out an enormous, grotesque web of lies," he said. "Why would we need a secret army?"

Swiss politicians have been questioning how such a scandal could have come about in the secret service, which only employs about 130 people, without the knowledge of senior officials.