US court nominee won't discuss financial regulation

* Sotomayor cites potential legal challenges

* She says business needs predictability in the law

By James Vicini

WASHINGTON, July 15 (Reuters) - U.S. Supreme Court nominee Sonia Sotomayor declined on Wednesday to say whether Congress has the constitutional power to regulate financial markets, an important issue as the Obama administration pushes for legislation from Congress.

At her Senate Judiciary Committee confirmation hearing, Sotomayor, who was nominated by President Barack Obama, said she could not answer the question because there could be legal challenges to any legislation that Congress approves.

Responding to the economic crisis, the Obama administration has proposed an independent agency that would have broad power to write and enforce rules on financial products such as credit cards and mortgages.

The proposed new consumer agency has drawn sharp criticism from the financial services industry and concern from current bank regulators, but it has become a top priority for the administration and Democratic lawmakers.

Senator Ted Kaufman, a Democrat from Delaware, told Sotomayor that he thought Congress would approve a financial regulatory reform package and asked whether Congress had the power to regulate financial markets.

"What I can say to you is that Congress has certain constitutional powers. One of them is to pass laws affecting interstate commerce," Sotomayor said.

She said it would depend on the nature of whatever statute Congress passed, what facts it relied upon and the remedy that it instituted.

Sotomayor explained why she could not answer the question.

"Because I can assure you, knowing every time Congress passes an act, there's a challenge by somebody," she said. "As soon as it's applied to someone and in a way that they don't like, they're going to come into court."

Under further questioning from Kaufman, she said that policy choices are up to Congress, and that deference has to be given to those choices.

Kaufman asked Sotomayor about her experience as a commercial litigator in New York, a job she held after being a prosecutor and before she became a federal judge.

She said she learned one main lesson -- that in business predictability of the law is necessary. (Editing by David Storey)