UPDATE 3-Financial consumers need new watchdog-Obama admin

* Senator Menendez backs proposed agency

* Financial lobbyists opposed

* Senator Dodd sees "radical situation" (Adds Menendez, Roundtable, Barr comments)

By Kevin Drawbaugh and David Lawder

WASHINGTON, July 14 (Reuters) - The U.S. government's fragmented system for protecting financial consumers is "designed to fail" and must be replaced by a single, powerful new agency, a senior U.S. Treasury official said on Tuesday.

As the Obama administration seeks support for a sweeping package of financial regulation reform proposals, Treasury Assistant Secretary Michael Barr urged lawmakers at a hearing to create a new Consumer Financial Protection Agency.

"The present system of consumer protection regulation is not designed to be independent or accountable, effective, or balanced. It is designed to fail," Barr told the Senate Banking Committee. "It is simply incapable of earning and keeping the trust of responsible consumers and providers ..."

"We have to have a fresh start with a new agency whose sole mission is standing up for the American people."

His call for change met general support from Democrats.

"While we can tailor this a little bit better, the reality is we need this," said Democratic Senator Robert Menendez.

Some Republicans resisted the proposal, following lines of attack already set by lobbyists for the financial industry, which sees the agency as a threat to its profitability.

"This is a tremendous overreach ... This is way out of bounds," said Republican Senator Bob Corker at the hearing.

Senator Richard Shelby, the committee's top Republican, called the proposed new agency "a radical departure."

President Barack Obama last month unveiled a wide-ranging package of proposals to rewrite the rules for banks and capital markets in response to a severe financial crisis that has dragged down economies worldwide for more than a year.

He wants to enact new laws by the end of the year. His proposals are expected to move rapidly through the House of Representatives, where Democrats are in firm control, with the closely divided Senate likely to move more slowly.

The Consumer Financial Protection Agency (CFPA) would take over consumer protection duties on mortgages, credit cards, payday loans and other products. At present, more than 10 agencies, including the Federal Reserve, handle these issues.