A key U.S. congressional panel moved toward toughening a plan for dealing with too big to fail financial firms on Tuesday, while rejecting a Republican alternative that is expected to reappear later.

The House Financial Services Committee, locked for weeks in debate over financial reforms, voted to kill a Republican measure that would have added a new chapter to the bankruptcy code for large, troubled non-bank financial institutions.

The unsuccessful proposal had been offered months ago by Republicans as an alternative to a major Democratic bill that was further debated and amended by the committee on Tuesday. A final committee vote is expected on Thursday.

A vote by the full House isn't expected until next month. The Republican alternative is likely to be offered as a bill on the House floor. Senate action is likely to go into 2010.

We're considering several amendments that would make the bill substantially tougher on those companies that pose a systemic risk to the entire financial system, Democratic Representative Brad Miller, a committee member, told Reuters.

Amendments that we'll see tomorrow and Thursday ... will make the bill tougher than what we got from Treasury.

Financial regulation reform is making slow progress on Capitol Hill more than a year since a capital markets crisis that drove the world financial system to the edge of disaster.

Wall Street lobbyists have resisted changes that threaten their profits, while Republicans have criticized the Democrats' proposal on too big to fail as enshrining bailouts in law.

The Obama administration is pursuing more than a dozen reform proposals. One calls for creating a new government protocol for dealing with distressed financial mega-firms.

The main goal of the proposal is to ensure that the Bush administration's confused handling of last year's crisis never happens again. In that episode, firms such as AIG and Citigroup got multibillion-dollar bailouts. Others, such as Lehman Brothers, were allowed to go into bankruptcy, while still others were forced into government-engineered mergers.

By the time we are through with the amendments that we will be proposing, there will be no taxpayer-funded bailouts, said the committee's Democratic chairman, Representative Barney Frank, at a bill-drafting session of the committee.

Our bill will provide no means by which a failing institution can be kept alive. There will be a way to put it out of its misery, and our misery, Frank said.

REPUBLICANS SKEPTICAL

But Republicans were skeptical and questioned the impact of the multibillion-dollar resolution fund proposed by Democrats.

If you construct a bailout fund, either before the fact or after the fact, it's going to be used for bailouts, said Republican Representative Jeb Hensarling.

It stretches credibility ... to be able to say there will not be a taxpayer bailout. I simply don't believe it.

Democrats lashed out at the Republican alternative as a weak answer to the regulatory failings revealed by the crisis.

This is what Wall Street wants to come out of all of this. They don't think we really need to change anything, Miller said.

The administration and committee Democrats last month unveiled a bill that would empower regulators to police, take over, restructure and, in some cases, shut down firms whose failure could threaten overall economic stability.

It resembled the power the Federal Deposit Insurance Corp already has to seize and dismantle troubled banks.

One amendment to the bill, from Representative Dennis Moore, would eliminate the option of putting failing firms into conservatorship, from which they could emerge later. Instead, only the harsher path of receivership would be available.

Another amendment expected from Representative Paul Kanjorski would give regulators stronger powers to break up firms seen as posing a risk to financial stability.

Still another amendment, coming from Miller and Representative Ed Perlmutter, would seek to impose limitations on proprietary trading within financial institutions.

Frank said an amendment is also expected to put a $200 billion cap on the fund for resolving failing firms.

(Reporting by Kevin Drawbaugh; Editing by Gary Hill)

Aig