UPDATE 1-U.S. should let some big banks fail - Republicans
* Top Republicans say tough decisions will reassure market
* Top Democrat urges time as Obama team surveys damage (Adds comments by Senator Schumer, background, byline)
WASHINGTON, March 8 (Reuters) - The United States should let some big troubled banks fail rather than commit more federal funds to prop them up, two key congressional Republicans said on Sunday.
Senator Richard Shelby, top Republican on the banking committee, said the United States should not mimic Japan, which in the 1990s propped up failing banks and prolonged its economic downturn.
"Close them down, get them out of business. If they're dead, they ought to be buried," Shelby told ABC's "This Week" program. "We bury the small banks. We've got to bury some big ones and send a strong message to the market."
Financial authorities have been under increasing fire as hundreds of billions of dollars of loans and capital infusions into distressed institutions have failed to halt the economic downturn, which has only accelerated in recent weeks.
Senator John McCain, who remains a Republican leader after losing the 2008 White House race to President Barack Obama, criticized the new administration's response to the banks.
"I don't think they made the hard decision and that is to let these banks fail," McCain told "Fox News Sunday."
As the U.S. government boosts its stakes in major banks such as Citigroup Inc (C.N), talk of nationalization has stirred a debate over how far regulators will go to help the ailing financial system.
Shelby did not mention any banks by name but, when asked about Citigroup, he said: "Citi's always been a problem child."
McCain echoed Shelby's criticism of U.S. banks but both senators avoided the term "nationalization" -- a concept typically derided by Republicans as a move toward socialism.
Asked what should be done, McCain said: "You'd sell off their assets and you have the -- unfortunately, the shareholders and others will take a beating."
Tom Donohue, president of the U.S. Chamber of Commerce, the nation's biggest business group, said it was "not practical to talk about closing a bank that is integrated throughout the whole global economy."
"It is practical to talk about buying some of those assets away from those banks and holding them in an institution that would have both public and private money," Donohue said on ABC's "This Week."
On Friday, Kansas City Federal Reserve President Thomas Hoenig criticized as piecemeal the approach taken by the government in handling of the banking upheaval.
"We understandably would prefer not to 'nationalize' these businesses but, reacting as we are, we nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis," Hoenig said in remarks to a local group.
CALL FOR PATIENCE
A key Democratic senator called for patience as the Obama administration takes stock of the current state of ailing banks, announced last month as a series of "stress tests."
The Treasury department said it would provide the 20 largest banks with sufficient capital if the exams find they need more funding to withstand a worse-than-predicted recession.
"Once these evaluations occur, there may be some banks -- and we don't know which ones, and I'm not going to name any -- that will never make it," Democratic Senator Charles Schumer said on NBC's "Meet the Press." "You don't just keep putting money in, money in, money in -- and the bank never solves it self."
Schumer, also on the banking committee, said there is a type of "good nationalization" modeled on what the Federal Deposit Insurance Corp. already does when it unwinds a bank. (Additional reporting by Mark Felsenthal; Editing by Cynthia Osterman)
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