In an unusual move that cut a senior Republican out of the loop, bipartisan U.S. Senate negotiations resumed on Thursday on financial regulation reform, a top priority of the Obama administration.

Restoring momentum to an initiative that had begun to lose headway, Senate Banking Committee Chairman Christopher Dodd, a Democrat, said he was now discussing legislation with Senator Bob Corker, a first-term Republican member of the panel.

I am more optimistic than I have been in several weeks that we can develop a consensus bill to bring about the reforms the financial sector so desperately needs, Dodd said in a statement on his dealings with Senator Corker.

Just six days ago, Dodd said he had hit an impasse with Senator Richard Shelby, the committee's top Republican, in talks that had dragged on for more than a year over tightening oversight of banks and capital markets.

President Barack Obama has made financial regulation a top priority for 2010, along with governments in the European Union, which are also hammering out new rules meant to prevent a recurrence of the recent global financial crisis.

One of Obama's key proposals -- creating an independent U.S. Consumer Financial Protection Agency (CFPA) to regulate mortgages and credit cards -- had torpedoed the Dodd-Shelby talks.

Giving no ground in response to Dodd's move, Shelby drew a firm line on the issue in a statement late on Thursday.

Shelby supports reforms to end the notion that some financial firms are too big to fail, to find new ways for the government to deal with failing firms and to regulate derivatives, Shelby spokesman Jonathan Graffeo told Reuters.

He said Shelby also wants to enhance consumer protection without subordinating the safety and soundness of our financial institutions, a position that the senator has staked out before in opposing Obama's watchdog agency.

CORKER SAW 'TRAIN WRECK'

The U.S. Treasury Department said it welcomed Corker's decision to work with Dodd to pass financial reform.

Senate Majority Leader Harry Reid told reporters, after Dodd's announcement, that he was comfortable we are going to be able to do a really good financial regulation bill.

Corker said on Thursday he wants to cooperate with Democrats on finding bipartisan agreement. He told Reuters Insider in an interview that the Dodd-Shelby impasse would have led to a legislative train wreck.

But Corker has also opposed the CFPA. Last year, when Obama recommended creating it, the Tennessee Republican called the proposed agency a tremendous overreach ... way out of bounds.

In a statement late on Thursday, Corker said the CFPA is probably the hot-button issue and Senator Dodd and I have agreed to set that topic aside for now.

Echoing Shelby, Corker added: Our goal should be trying to ... enhance consumer protection without negatively impacting the safety and soundness of our financial system.

The CFPA would be a new agency centralizing consumer protection laws and staff that are now scattered across several existing government agencies, including the Federal Reserve.

Democrats back the idea because they say the Fed and other agencies did a poor job of protecting Americans from abusive mortgages in the run-up to the financial crisis of 2008-09.

Banks and financial firms oppose the agency as a threat to their profits and a red-tape burden. Republicans say it would be an unneeded intrusion on business, and that separating consumer protection from bank supervision would be a mistake.

HOUSE APPROVED WATCHDOG

Adopting many proposals made by Obama in mid-2009, the U.S. House of Representatives in December approved a reform bill, calling for the most sweeping changes since the 1930s, over the objections of Republicans and Wall Street lobbyists. The bill included a provision establishing the watchdog agency.

Dodd and Republicans have discussed, as a possible compromise, downgrading the CFPA to less than an independent agency, perhaps as a Treasury Department division. Consumer advocates and senior House Democrats oppose this approach.

Democratic Senator Mark Warner, a banking committee member, told CNBC on Thursday that the debate on the consumer protection proposal is a little bit thorny.

He said financial reform is too important to fail, and that he and Corker agree on 98 percent of another issue -- setting up a new government body to monitor and manage systemic risk in the economy and the financial system.

Senator Tim Johnson, the second-ranking Democratic committee member after Dodd, said in a statement that Dodd's announcement on talks with Corker shows there is bipartisan interest in completing financial services regulatory reform.

He called the initiative too important to push off or to become the target of political games.

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