Despite declaring its neutrality, Luxembourg was occupied by Germany during both World Wars. Attempts to escape German influence initially led to an economic union with Belgium in 1921.
After renewed occupation in World War II, Luxembourg abandoned its neutrality and became a front-rank enthusiast for international co-operation.
Luxembourg became a founder member of a customs union with Belgium and the Netherlands in 1948, and of the European Economic Community, a forerunner of the European Union, in 1957. Around one-third of Luxembourg's population are foreigners.
Luxembourg's prosperity was formerly based on steel manufacturing. With the decline of that industry, Luxembourg diversified and is now best known for its status as Europe's most powerful investment management centre.
But the country's strict laws on banking secrecy produced a system that was open to exploitation for the purposes of tax evasion and fraud.
Concern over Luxembourg's reputation as a tax haven - especially in the wake of the 2008 financial crisis - prompted the G20 group of countries to add it to a "grey list" of nations with questionable banking arrangements in April 2009.
Luxembourg responded by taking steps to improve the transparency of its financial arrangements. By July 2009 it had signed agreements on the exchange of tax information with a dozen countries, and was commended by the OECD for its prompt efforts to implement the internationally agreed standard.
Luxembourg's politics are characterised by stability and long-serving administrations.
This tranquillity was interrupted in 2008, when Grand Duke Henri said his conscience would not allow him to sign into law a bill approving euthanasia.
The crisis was resolved by a constitutional reform which removed the need for laws to be approved by the monarch, reducing the post to a largely ceremonial role.
Jean-Claude Juncker, of the conservative Christian Social Party, has been prime minister since 1995 when his predecessor, Jacques Santer, became president of the European Commission.
He carries on as premier in coalition with the Socialist Workers Party following general elections in June 2004. For the five years before that his party had formed a coalition government with the Democratic Party.
Jean-Claude Juncker was born in 1954 and is a lawyer by training.
Luxembourg exerts immense media clout and has a long tradition of operating radio and TV services for pan-European audiences, including those in France, Germany and the UK.
Media group RTL is behind much of this activity. Its outlets have been a part of the broadcasting landscape in France and Germany for decades.
Generations of British listeners grew up with Radio Luxembourg, which beamed pop music programmes into the UK. "The Great 208" is no more, but RTL is still a key player in media markets across Europe.
Luxembourg's media empire extends to the skies. It is home to Europe's largest satellite operator, Societe Europeenne des Satellites (SES), which operates the Astra fleet.
RTL and other privately-owned radios and TVs cater for domestic audiences. The constitution guarantees freedom of speech and of the press. Print media are privately owned and reflect diverse viewpoints.
By June 2010, there were 424,500 internet users (Internetworldstats).
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