Its domestic politics are characterised by long-serving administrations.

Prime Minister Jean-Claude Juncker was re-elected in June last year for his third consecutive five-year term.

His conservative Christian Social Party, in a coalition with the Socialist Workers Party, looks set to keep a steady hand on government and the economy.

Like much of Europe, Luxembourg's prosperity was formerly based on steel manufacturing.

With the decline of that industry, it was forced to diversify towards a service economy, and since the 1960s it has become known worldwide for its position as a tax haven and banking centre.

The latter occurred mainly as a result of low costs, friendly regulations and a tax-free environment.

Luxembourg, which has Belgium, France and Germany as its neighbours, is now one of two key centres in Europe for the listing of eurobonds, offered worldwide in the form of syndicated loans by banks from Europe and the United States.

Precise data is not available, but analysts guess that this market is worth close to US$5 trillion, with most of the funds held in Luxembourg and London.

The country's financial sector had a satisfying year in 2004. Bank profits were up, accompanied by a recovery in employment from the second quarter.

Despite the problem of structural unemployment that plagues many developed countries, the rise in joblessness in Luxembourg has recently slowed down and is forecast to increase only slightly to 4.5 per cent this year. Inflation was kept to 2.2 per cent despite continued oil price rises.

One of Luxembourg's greatest challenges has been the maintenance and development of a multicultural and qualified workforce.

Keeping a competitive edge through knowledge had long been made more difficult by the absence of its own university.

In 2000, the then-government of Mr Juncker decided to create a university from scratch.

The University of Luxembourg, which opened its doors to students in the last academic year, brought together the country's assorted higher education establishments into one institution.

According to Rolf Tarrach, the university's rector, a country of Luxembourg's stature should have its own university.

He said that before the creation of the institution, the best universities were 200km away and far removed from debates in Luxembourg.

'We needed an institution to look at these issues and to offer answers. If a ministry needs skills, a university would be well placed to offer this,' he said.

The University of Luxembourg is still developing, with only 150 teaching staff and 2,700 students.

But the number of undergraduates is forecast to rise to 10,000 by 2015, most of them Luxembourgers who without the new university would have gone to study abroad.

While the absence of a national university has been a shortcoming, it has also given Luxembourgers the opportunity and benefit of broadening their horizons by studying in another country.

This 'internationalism' has long been a focus of Luxembourg and its citizens, who abandoned their neutral position and became fervent supporters of international co-operation, following occupation by Germany during both world wars.

One of six founding members of the European Economic Community (a forerunner of the EU) in 1957, it joined the European monetary union in 1999 and gave up its currency for the euro in January 2002.

Internationalism and compromise have also been a focus of the country's six-month presidency of the EU.

Presiding over a difficult, even precarious, time for the union has not been easy for Mr Juncker.

With 'no' votes in France and Holland putting the future of the European constitution in doubt, and the current disagreement between member states over a new EU budget for 2007 to 2013, Luxembourg and its prime minister have been in damage control mode for much of the presidency.

Indeed, Mr Juncker had said that the responsibility sat heavy on his shoulders because the common interests of the member states must take priority over those of Luxembourg.

Before this month's EU summit in Brussels, Mr Juncker warned that disagreement on the budget at the meeting would turn current difficulties into a 'big European crisis'.

Long known as a pragmatic leader, he presented a compromise - limiting the budget to 1.056 per cent instead of 1.14 per cent of the EU's gross national income - and, by all accounts, remained determined to reach an accord before Luxembourg's EU presidency is concluded at the end of this month.

Key facts

Full country name Grand Duchy of Luxembourg

Area 2,586 sq km

Population 468,571 (July 2005 estimate)

Capital city Luxembourg

Languages Luxembourgish (or Letzeburgesch), French, German, English and Portuguese Religion More than 90 per cent Roman Catholic

Government Constitutional monarchy

Head of state Grand Duke Henri

Head of government Prime Minister Jean-Claude Juncker

GDP US$21.94 billion

Major industries Banking, insurance, information technology, agriculture, iron and steel, plastic and rubber, chemicals, mechanical and electrical equipment, food processing, tourism

Currency Euro