A three-day Senate standoff over efforts to overhaul financial regulation ended on Wednesday as Republicans dropped efforts to block a Democratic bill in exchange for a handful of concessions.

A deal to proceed came after Democrats threatened to keep the Senate in session all night to put pressure on Republicans. Minutes after an aide said cots would be set up for senators to sleep on, an agreement was announced.

Formal debate on the bill will begin at 12:15 p.m. (1615 GMT) on Thursday, said Senate Democratic Leader Harry Reid.

The deal is a milestone for the Obama administration's push to tighten bank and capital market oversight after the worst financial crisis in generations. With parallel efforts advancing in the European Union, markets are watching closely to see how dramatically the banking sector may be reshaped.

Senate Republicans have finally agreed to let us begin this debate, which we appreciate, and we hope this foreshadows more cooperation to come, Reid said.

Reid said he will offer the first amendment, combining the main bill with portions of a narrower measure from the Senate Agriculture Committee that deals with regulating the unpoliced $450 trillion over-the-counter derivatives market.

President Barack Obama, a strong supporter of the main Senate bill, said he was pleased that an agreement appeared to be close on debating what could be the biggest overhaul of financial regulation since the 1930s.

We can't let the recovery that's finally beginning to take hold fall prey to a whole new round of recklessness, Obama said in Quincy, Illinois.

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

On the issues, the two sides are not that far apart.

The main Senate bill addresses maintaining stability of the financial system, regulating risky financial instruments blamed for contributing to the financial crisis, and protecting consumers from financial products that have also been blamed for playing a role in the crisis.

DEMOCRATS MAKE CONCESSIONS-AIDE

A Republican aide said Democrats made six concessions as part of the agreement to proceed. One was to drop a proposal to set up a $50 billion fund to help pay for dismantling large financial firms that are in distress, the aide said.

Asked if the fund was out of the bill, Republican Senator Bob Corker told Reuters, That's my understanding.

Senate Banking Committee Chairman Christopher Dodd, chief author of the Democratic bill, said earlier in the day that the $50 billion fund issue was still undecided.

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

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 crack down on banking and dealing practices, and what that may mean for banks' capital and valuations.

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, an issue on which Republicans have expressed concern.

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

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.

In votes on Monday, Tuesday and Wednesday, Democrats had fallen 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.

(Additional reporting by Tabassum Zakaria, Thomas Ferraro and Richard Cowan in Washington and Patricia Zengerle in Quincy, Illinois; Editing by Leslie Adler)

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