UPDATE 1-US accounting board softens fair value proposal

* Preliminary decision on loan values issued by FASB

* Banking industry opposes "mark-to-market" proposal (Updates with details on lease accounting)

By Dena Aubin

NEW YORK, Jan 25 (Reuters) - In a big victory for banks, U.S. accounting rule-makers moved on Tuesday to reverse a controversial plan that would have forced banks to value many of their loans based on market movements.

The step by the Financial Accounting Standards Board to scale back a "fair value" accounting proposal was applauded by the banking industry, which has lobbied fiercely against it amid concerns that it would curb lending and hurt an already fragile economy. FASB sets U.S. accounting standards.

Under the accounting model tentatively approved by FASB on Tuesday, banks like Bank of America Corp(BAC.N) and JPMorgan Chase & Co (JPM.N) will be able to continue valuing some of their loans at adjusted historical costs instead of being forced to adjust the loans' value based on market movements.

"Today's shift recognizes investor concerns that a company's business model should be a key factor in measuring financial instruments," said Frank Keating, president and chief executive officer of the American Bankers Association.

"While mark-to-market can be very useful for a business that trades financial instruments, the most appropriate accounting measure for a loan portfolio is the loan balance minus impairment," he said.

The ABA said the tentative decision is expected to result in a final standard later this year.

A tightening of fair value or mark-to-market accounting has often been blamed by critics, including members of Congress, for intensifying the financial crisis. Those critics say the accounting practice triggered massive bank write-downs as prices of mortgage securities fell.

FASB's decision came after numerous investors weighed in to say they favored amortized cost accounting for assets that are held on a company's books, FASB Chairman Leslie Seidman told reporters during a webcast briefing.

The decision on valuing loans is part of a wide-ranging change in rules governing how companies account for financial instruments, expected to be completed by June.

Financial instrument accounting is one of several high-priority projects FASB is working on as it tries to align U.S. accounting standards with international rules.

Seidman said FASB is still very committed to reaching a single, consistent set of global standards and is working to complete its top-priority projects by midyear.

In addition to financial instruments, FASB is also targeting a June completion date for rules on revenue recognition, leases and presentation of other comprehensive income.

Seidman said FASB also plans to reconsider many parts of its proposal on lease accounting, another standard that drew staunch opposition from business groups.

The proposal would require companies to bring hundreds of billions of dollars of leases onto their balance sheets, a move meant to give a truer picture of companies' liabilities.

Retailers and other businesses complained, however, that the rules were too complex and would be costly to implement.

Provisions to account for renewal options and contingent rents, or rents that vary with factors such as a store's sales volumes, as part of lease liabilities came in for particularly heavy criticism.

"The message is we heard the concerns and stay tuned," Seidman said.

Businesses had also complained that the proposed changes would cause their reported liabilities to jump, in some cases tripping companies' debt covenants. (Additional reporting by Sarah N. Lynch, editing by Gerald E. McCormick, Gary Hill)