U.S. Senate Republicans on Wednesday were poised to clear the way for formal debate to begin on the most sweeping overhaul of financial regulation since the 1930s as they dropped efforts to block the bill.

Senate Republicans will at last allow debate on the bill to bring accountability to Wall Street, Senate Banking Committee Chairman Christopher Dodd said in announcing a dramatic deal ending a three-day standoff.

The agreement came after Democrats threatened to hold an extraordinary all-night session to pressure Republicans to drop their opposition after they had blocked action on the bill for three consecutive days.

On the issues, the distance between the two sides is not huge and analysts expect a bill to pass eventually.

However, more procedural obstacles could lie ahead, with Democrats fearing that Republicans could threaten to filibuster individual amendments to the bill as they are proposed.

Senate Republican Leader Mitch McConnell said bipartisan negotiations between Dodd and Senator Richard Shelby, the banking committee's top Republican, had ended.

Now that those bipartisan negotiations have ended, it is my hope that the majority's avowed interest in improving this legislation on the Senate floor is genuine and the partisan gamesmanship is over, McConnell said in a statement.

A McConnell aide said bipartisan agreement was reached on dealing with too big to fail financial firms, but not on derivatives and consumer protection.

With congressional elections set for November, lawmakers from both parties are keen to pass a bill, while banking lobbyists have fought for months to block and weaken reforms.

Financial markets are watching how strongly the legislation will be to crack down on banking and dealing practices, and what that may mean for banks' capital and valuations.

The Republicans floated their first written counterproposal on Tuesday. Analysts described it as extremely similar to the Democratic bill, which has been under development for months in response to the 2008-2009 financial crisis.

DEMOCRATS TARGET ANGER

Worried about losses in this year's elections, Democrats are keen to take advantage of widespread anger at Wall Street, perhaps the only address more unpopular than Capitol Hill.

Dodd told reporters on Wednesday that his 1,558-page bill would not impinge on the ability of small businesses such as auto dealers and dentists to offer installment payment plans. Republicans have expressed concern about this issue.

But an aide said companies that profited from such loans might have to answer to the new consumer watchdog.

Dodd told Reuters no decision has been made on the status of a $50-billion fund proposed by Democrats to help pay for dismantling big financial firms in distress. Republicans have demanded that the fund be dropped.

I have people all over the lot on that issue, Dodd said. There is no decision on anything yet.

Dodd's bill would create an orderly liquidation process for unwinding large firms, aiming to prevent more taxpayer bailouts like 2008's rescue of AIG and the shock bankruptcy of Lehman Brothers.

CONSUMER AGENCY BIGGEST STUMBLING BLOCK

Shelby, who has led the Republican negotiating effort, said on Tuesday that the proposed consumer-protection agency was the biggest stumbling block.

The Democratic bill would also impose regulations on the unpoliced $450-trillion over-the-counter derivatives markets, curb risky trading by banks, force hedge funds to register with the government and crack down on debt securitization.

Any bill that passes the Senate would have to be reconciled with a version that cleared the House of Representatives in December. Analysts say that could happen by mid-year.

The Republican counterproposal was the first time the minority party in the Senate has set down its goals on paper during months of closed-door negotiations. It would set up a consumer-protection council, rather than the consumer-protection bureau envisioned by Democrats.

Republicans also want to restrict the Federal Reserve's emergency-lending authority more than Democrats, while allowing national bank regulators to continue to preempt state laws.

In votes on Monday, Tuesday and Wednesday, Democrats fell short of the 60 votes needed to advance bills in the 100-seat Senate. Democrats control 59 seats, one short of the number needed to overcome procedural hurdles.

However, the shift by Republicans suggests Democrats will be able to muster the support needed to move forward.

(Additional reporting by Tabassum Zakaria and Thomas Ferraro)

Down