U.S. taxpayers will probably never recover all of the hundreds of billions of dollars invested to bail out financial firms, automakers and homeowners, a key watchdog for the program said on Thursday.

Neil Barofsky, the special inspector general for the U.S. Treasury's $700 billion Troubled Asset Relief Program (TARP), said in prepared U.S. Senate testimony that the bailout fund played a significant role in stabilizing the financial system, but it may never fulfill certain policy goals.

The progress on meeting the goal of 'maximizing overall returns to the taxpayer' is unclear, Barofsky said in testimony to be delivered to the Senate Banking Committee.

While several TARP recipients have repaid funds for what has widely been reported as a 17 percent profit, it is extremely unlikely that the taxpayer will see a full return on its TARP investment.

For example, $50 billion in funds allocated to modify mortgages to reduce monthly payments will never yield a direct return, while full recovery of the more than $80 billion spent to prop up the U.S. auto industry is far from certain, Barofsky said.

According to the inspector general's analysis, Treasury has earmarked $699 billion of the funds to 12 different programs, including a $134.5 billion cushion of funds available for future use. It has disbursed or committed to disburse $445 billion.

The program, approved by Congress in early October 2008, was originally intended to buy up the toxic assets weighing down bank balance sheets, but within two weeks idea was quickly dropped in favor of direct capital injections into banks as the financial crisis reached its peak.

Barofsky, who took office in December 2008, said the Treasury has improved its transparency in administering the program, but has repeatedly failed to implement his recommendations to increase disclosures, including detailed reports on what banks are doing with taxpayer funds.

We remain puzzled as to why Treasury refuses to adopt our recommendations to report on each TARP recipient's use of TARP funds.

Barofsky also said that Treasury also has refused to adopt regular disclosures of borrowers that fail to repay loans obtained through a Federal Reserve securities lending program aimed at easing pressures in consumer credit markets.

He also said the Treasury does not intend to disclose trading activities, holdings and asset valuations in so-called public-private investment partnerships that are being created to buy troubled assets. About three quarters of the $40 billion in nine funds will be supplied by the Treasury.

In response, Treasury spokesman Andrew Williams said the department has implemented the vast majority of Barofsky's recommendations and has included the inspector general early in the development of many programs.

Williams said the Treasury will soon expand its quarterly TARP lending reports to include data recommended by Barofsky in a survey of lenders, such as financial institutions' aggregate repayments of their outstanding debt obligations and total investments.

(Editing by Lincoln Feast)