* Frank sees debit card fee limits in final bill
* Shelby, Dodd clash at first House-Senate panel session
* Next meeting on Tuesday to be on credit rating agencies
* Also on Tuesday agenda: insurance, bank agencies, funds (Recasts with Frank, Dodd, Obama, Davis comments, outlook)
By Kevin Drawbaugh and Andy Sullivan
WASHINGTON, June 10 (Reuters) - U.S. lawmakers proposed no new limits on banks on Thursday as they met to hammer out a final overhaul of Wall Street regulations, but they voiced strong support for measures that directly threaten industry profits.
The final bill being crafted in a House-Senate conference committee will hit banks hard, leaders said at the end of a meeting where lawmakers staked out opening positions on the biggest overhaul of the financial industry in decades.
The committee's next session is scheduled for Tuesday when it will focus on reforms related to credit rating agencies, insurers, hedge funds and bank supervisory agencies. A half-dozen more meetings are expected through June.
Democratic Representative Barney Frank said the final bill probably will limit debit card fees. He also told reporters after the opening session that a tougher "Volcker rule" curbing risky bank trading likely will be in the bill, as well as some aggressive new over-the-counter derivatives regulation.
On debit card fees, he said: "I think some modifications will be coming, but basically, it's one where there's pretty strong support for the underlying provision."
Democrat Christopher Dodd, the panel's lead senator, said he supports a controversial measure from Democratic Senator Blanche Lincoln that would force banks to spin off their lucrative swap-trading desks.
"We haven't resolved that yet," Dodd said, but he added "at this point ... I'm supportive of what she has in the bill. We need to work from here and see where our colleagues are."
Approval of a final bill is expected by early July. President Barack Obama has made tighter financial oversight a top goal. He urged Congress on Thursday to complete the bill, which would give Democrats a major domestic policy victory.
Key Republicans conceded that they will probably be powerless to block reforms that they and the banking industry have resisted for months.
Republican Senator Richard Shelby decried the bill but said it will "likely become law."
"I am afraid that our economy's prognosis is not good unless significant changes are made to this bill," he said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ (For a Factbox briefly listing the keys to Wall Street reform in Congress, double-click on [ID:nN28188452])
(For a Factbox with details on major U.S. financial regulation reform proposals, double-click on [ID:nN27130507])
(For a Factbox on some financial reforms missing from U.S. legislation, double-click on [ID:nN09128173]) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Dodd warned that a "last-minute lobbying blitz" by reform opponents would not weaken the sweeping bill, which would set up a new protocol for dismantling troubled financial firms to avoid bailouts like rescue of insurer AIG (AIG.N).
It would also create a new financial consumer watchdog and mandate higher bank capital standards, all in an effort to avoid a repeat of the 2007-2009 credit crisis that hammered the economy and triggered huge taxpayer bailouts of Wall Street.
The conference committee must merge bills already approved by the Senate and the House. Its initial meeting came two days after primary elections rewarded candidates who were tough on big Wall Street banks, which have become deeply unpopular since the crisis.
Lincoln's surprise victory in a Democratic primary election on Tuesday vindicated her get-tough-on-Wall-Street politics, analysts said.
Lincoln's proposal would force banks to spin off their lucrative trading desks for over-the-counter derivatives, such as credit default swaps. She wants to ensure that trading of this sort -- widely criticized for aggravating the crisis -- does not drag down banks.
"Derivatives dealing is not central to the business of banking," Lincoln said at the opening of the panel session.
Representative Collin Peterson, who chairs the House Agriculture Committee, said banks should be able to use derivatives to hedge risks in the banking business. But he said he would consider Lincoln's call for a ban on other swaps activity.
Analysts expect the Lincoln provision to be dropped from the final legislation. Frank has spoken out against it and the Obama administration, which firmly backs other reforms, has also shown little interest in the plan.
But Dodd said her primary victory strengthens her hand. Some Democrats may want to show support for Lincoln as she heads into her November general election contest. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ (For the full "base text," go to here)
(For a Factbox on proposed new swaps market rules, double-click on [ID:nN07134624]) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Although financial shares have frequently come under pressure on fears about the impact of regulatory reforms, bank stocks rose on Thursday as Wall Street staged a broad rally. The KBW Banks index .BKX surged 3.7 percent.
So far in 2010, the KBW index is up 14.5 percent versus a 2.5 percent drop for the broad-based S&P 500. Bank stocks were badly beaten down during the financial crisis.
The sector might undergo a relief rally on passage of the reform bill, despite some of the contentious portions in it, said Jeff Davis, bank analyst with Guggenheim Partners LLC.
Lawmakers introduced a modified version of the Senate bill to serve as a start of the negotiations which included dozens of tweaks. None of the changes altered the main provisions, including Lincoln's provision on swaps.
Swaps are financial contracts tied to movements in commodity prices, interest rates or -- as in credit default swaps -- on the chance of a borrower defaulting on its debts. These off-exchange market contracts were were widely blamed for aggravating the financial crisis.
These and other major financial institutions were bailed out by taxpayers in 2008-2009, prompting public outrage and unleashing a wave of reform initiatives worldwide.
The Obama administration is pushing for tough reforms, which it hopes to hold out as an example to other nations.
The United States is already further along than the European Union in achieving changes to regulation pledged last year by the Group of 20 countries. The G20 holds a summit in Toronto in two weeks, just as the congressional panel is due to be winding up its work. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ (For a Factbox listing the 43 House-Senate conferees, double-click on [ID:nN07215551])
(For a Factbox on international financial reform efforts, double-click on [ID:nLDE6581QU])
For a Factbox comparing EU and U.S. financial reforms, double-click on [ID:nLDE6582FW] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Additional reporting by Roberta Rampton, Mark Felsenthal, Kim Dixon, David Morgan and Karey Wutkowski in Washington; Joe Giannone and Chris Sanders in New York; and Joe Rauch in Charlotte, N.C.; Editing by Eric Walsh