UPDATE 2-US Treasury says regulation key to averting crises

(Adds comments from question-and-answer session, details)

WASHINGTON Oct 1 (Reuters) - The United States should focus on reforming financial regulation in order to be armed against future crises, rather than making unrealistic promises to never bail out another financial firm, a top U.S. Treasury official said on Thursday.

"Such a promise does not bind future governments and ultimately is not credible," Assistant Treasury Secretary Michael Barr said.

Despite signs the United States has moved back from the financial brink and is headed toward economic recovery, "we cannot ignore the urgent need for action," he told the National Economists Club.

"Our regulatory system is outdated and ineffective and the weakness that contributed to the financial crisis persist. The progress of recovery must not distract us from the project of reform," Barr said.

"Some argue that we could better restore market discipline and reduce moral hazard by simply committing the government will never again bail out a financial firm.

"We disagree," Barr said.

He said the "shock absorbers" that typically protect the financial system -- capital, margins and liquidity cushions -- were inadequate for withstanding the current global recession.

In response to questions, Barr said it was vital for the Obama administration to get financial reform done soon and that it should be possible this year.

That would help shrink "moral hazard" by reducing the probability that government intervention to preserve an individual firm would be necessary and would create a way to wind up troubled firms, Barr said. (Reporting by Lucia Mutikani and Doug Palmer; Editing by James Dalgleish)