We calculate the instanton partition function of the four-dimensional N=2*
SU(N) gauge theory in the presence of a generic surface operator, using
equivariant localization. By analyzing the constraints that arise from
S-duality, we show that the effective twisted superpotential, which governs the
infrared dynamics of the two-dimensional theory on the surface operator,
satisfies a modular anomaly equation. Exploiting the localization results, we
solve this equation in terms of elliptic and quasi-modular forms which resum
all non-perturbative corrections. We also show that our results, derived for
monodromy defects in the four-dimensional theory, match the effective twisted
superpotential describing the infrared properties of certain two-dimensional
sigma models coupled either to pure N=2 or to N=2* gauge theories.Comment: 51 pages, v3: references added, typos fixed, footnote added, some
small changes in the text, appendix B streamlined. Matches the published
versio