UPDATE 1-Regulators strugging with Internet gambling rules

(Adds details from hearing)

WASHINGTON, April 2 (Reuters) - U.S. Federal Reserve and Treasury officials said on Wednesday they were struggling to craft rules to ban bank and credit card payments to illegal Internet gambling sites because federal law is unclear about what type of gambling is illegal online.

"That is something we're really struggling with," Louise Roseman, the Fed's director of reserve bank operations and payment systems, told a House Financial Services subcommittee.

"The challenge we have is interpreting ... federal laws that Congress itself isn't sure what they mean," Roseman said.

Congress passed a bill in 2006, when Republicans were still in control of the Senate and the House of Representatives, that prohibits companies from accepting payments in connection with "unlawful Internet gambling."

It also instructed the Federal Reserve and the Treasury Department, in consultation with the Justice Department, to come up with rules to enforce the act.

But rather than define what types of gambling are illegal online, the Unlawful Internet Gambling Enforcement Act of 2006 relied on existing Federal and state laws to answer that question. It also still allowed any online horserace betting permissible under the Interstate Horseracing Act of 1978.

Now, both gambling and financial industry companies want to be told specifically which transactions should be blocked.

"Clarity on this point would permit them to design policies and procedures that they could be assured would meet the rule's requirements," Roseman said. "Still others, including some gambling businesses and many consumers, asked that the rule clarify that certain types of gambling, such as pari-mutuel betting or poker, are lawful."