WASHINGTON - A key U.S. congressional committee will release draft legislation on Tuesday to restrict future bailouts and give the government a new way to deal with giant financial firms that get into trouble, a senior congressional source told Reuters.

The draft bill calls for creation of a Financial Stability Council to monitor systemic risk in the economy and identify specific problem areas for attention, the source said.

Existing agencies would work out details to help execute the council's orders. Funding for addressing problems at specific firms would come from U.S. Treasury Department loans that would have to be repaid by both banks and non-bank financial firms so taxpayers would not foot the bill, the source said.

The bill would empower the council to make decisions about the treatment of shareholders, creditors and management in cases requiring the government to step in, the source said.

Shareholders will be wiped out. Creditors can take major hits. Management can be replaced, the source said.

President Barack Obama and congressional Democrats have worked for months on a strategy to try to prevent another episode like the Bush administration's confused handling last year of the worst financial crisis in generations.

That response resulted in massive taxpayer bailouts for some firms, such as mega-insurer American International Group, no aid for others such as former Wall Street powerhouse Lehman Brothers, which collapsed, and government-engineered merger deals for others.

(Reporting by Kevin Drawbaugh)

Lehman brothers