The U.S. Congress edged closer on Wednesday to creating new government powers to break up giant financial firms, which Europe is already doing, while a U.S. derivatives market crackdown got more complicated.

More than a year since the collapse of Lehman Brothers and massive government bailouts of firms such as American International Group, the Congress is slowly working its way through more than a dozen financial regulation reform proposals from the Obama administration.

The House of Representatives has been up to its ears in debate and amendments for weeks, while the Senate only recently has begun to gear up for tackling the reform agenda.

A House committee voted on Wednesday to approve a measure that would empower a new council of government regulators to force divestitures by firms considered too big to fail whose collapse could threaten the stability of the economy.

With the goal of cutting such troubled giants down to size before they slide into crisis, the House Financial Services Committee voted 38-29 for the breakup power proposal.

The European Commission has already approved restructuring plans for a handful of EU financial giants, including Britain's Lloyds Banking and Dutch group ING. As many as 28 more EU firms are being eyed for possible divestitures.

The U.S. Federal Deposit Insurance Corp already has power to take over and close insolvent banks.

But the proposed authority would be more preemptive and cover insurance companies, banks, hedge funds, whoever may be in an exposed area of causing systemic risk, said its author, Democratic Representative Paul Kanjorski, head of the House capital markets subcommittee, at a committee working session.

The Kanjorski measure was approved as an amendment to a broader bill expected to come up for a full committee vote later, possibly on Friday. A final House vote on financial regulation reform was not expected until mid-December.

The Senate Banking Committee is scheduled to meet on Thursday to begin work on a 1,136-page reform bill introduced last week by committee Chairman Christopher Dodd, a Democrat.

The measure is likely to undergo weeks of debate as it has little support among Republicans.

We have a lot of reservations on the Republican side, said Senator Judd Gregg in a Reuters Television interview on Wednesday.

DISCORD ON CONSUMER WATCHDOG

One key point of disagreement is the administration's proposal, backed by Dodd, to form a Consumer Financial Protection Agency to regulate mortgages and credit cards.

I think all Republicans have taken the position that the independent consumer protection agency is a huge mistake, said Gregg, a Republican banking committee member from New Hampshire, who added that Republicans will offer an alternative to Dodd's bill.

Another issue riven with disagreement is regulation of the over-the-counter derivatives market, including credit default swaps, widely blamed for amplifying last year's crisis.

Democratic Senator Blanche Lincoln, chairman of the Senate Agriculture Committee said on Wednesday she plans to offer her own OTC derivatives bill, which would be the sixth major piece of legislation in this area introduced into this Congress.

On another issue, Senate Republicans blocked an attempt by Dodd on Wednesday to call a Senate vote on a bill to force credit card companies to freeze interest rates and fees on existing balances until new industry rules take effect.

The setback reflected deep divisions over financial issues within the Senate, where Democrats lack the clear majority that they enjoy in the House.

Wall Street and banking lobbyists, who are fighting regulatory changes that threaten profit margins, swarmed the halls outside the House Financial Services Committee's meeting on Wednesday, buttonholing lawmakers to try to influence their views.

But most of the lobbyists are betting that the Senate is where the reform agenda will falter and get watered down.

Utah Republican Senator Bob Bennett on Wednesday told Reuters Television in an interview: We obviously hope we can get a bipartisan bill. I don't think we're there yet.

If we're going to get a bipartisan bill, the timetable is going to have to stretch out. We can't do it in the very short timeframe that some people are demanding, he said. We just don't have enough areas of agreement to do it that fast.

Treasury Secretary Timothy Geithner, who has served as President Barack Obama's point man on reforms, is slated to testify on Thursday before Congress' Joint Economic Committee.

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