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By Rachelle Younglai

WASHINGTON (Reuters) - A proposal to audit the Federal Reserve gained momentum in the U.S. Senate on Thursday after the measure was softened at the last minute to address concerns raised by the central bank and Obama administration.

The full Senate may vote as soon as Thursday to include the audit proposal in a broad overhaul of financial regulation that would strip the Fed of its authority to supervise thousands of regional banks.

At least 20 Democratic and Republican lawmakers support the amendment from Senator Bernie Sanders, which would expand congressional investigators' powers to audit the Fed. A bill approved by the House of Representatives in December contains a similar provision.

Sanders picked up the support of Christopher Dodd, the Democrat overseeing the financial-reform bill in the Senate, after he modified it to protect the Fed's independence.

The Obama administration also approved of the revised measure. Deputy Treasury Secretary Neal Wolin said the amendment now strikes the appropriate balance of providing full transparency of the Fed's lending programs while protecting the central bank's independence.

Sanders modified the measure to limit congressional investigators to a single audit of the Fed's use of emergency-lending authority since December 1, 2007. That would close the door to further audits.

In addition, Sanders would give the Fed more time to comply with a requirement to disclose information about its role in the Wall Street bailouts during the 2008-2009 financial crisis -- instead of 30 days after the enactment, the Fed would have until December 1 to comply.

Earlier, Fed Chairman Ben Bernanke slammed the amendment and said it would not only "seriously threaten" monetary policy independence, but would also increase inflation fears and damage economic stability and job creation.

During the week, the Fed was trying to persuade lawmakers that such measures would undermine its credibility to set monetary policy and jeopardize the country's longer-term economic objectives.

Presidents of five regional Fed banks were on Capitol Hill this week to try to convince lawmakers not to hand over the central bank's supervision of the smaller banks to other regulators. They also raised concerns over the audit provision.

Separately, Republican Senator Charles Grassley and Democratic Senator Byron Dorgan are pushing for a provision that would shed more light on Fed operations.

Their proposed amendment would require the Fed to reveal the names of the financial institutions that received emergency assistance from the central bank, how much aid was received, and under what terms the assistance was given.

Fed officials are deeply opposed to the measure and have said it could discourage financial firms from using lending facilities when needed, because such disclosure could make them appear weak.

One former Fed official said anything that would make healthy banks more reluctant to come to borrow from the Fed when they need temporary assistance leaves the financial system less flexible, resilient, and stable.

"It's also a very worrisome step in the direction of subjecting monetary policy to political scrutiny and influence," said John Dearie, now executive vice president with the Financial Services Forum, a group that represents the chief executives of the largest financial firms.

The Fed intervened repeatedly during the financial crisis to rescue troubled firms like the now-defunct investment bank Bear Stearns and insurer AIG. Lawmakers want to put a check on those extraordinary powers.

Lawmakers are also upset that the Fed did not do enough to clamp down on the rampant subprime lending that fueled the housing bubble and eventually led to Wall Street's meltdown and ensuing global economic crisis.

A host of measures in the bill the Senate is considering are designed to make the Fed more accountable. One such measure would make the president of the New York Fed, the central bank's operating arm on Wall Street, a political appointee.

The House passed its own bill to revamp financial regulations in December that includes a measure that would open up monetary policy decision to congressional audits.

Whatever eventually emerges from the Senate will have to be merged with the bill already passed by the House before President Barack Obama can sign the reforms into law.

(Additional reporting by Andy Sullivan, Kevin Drawbaugh, Kristina Cooke, Caren Bohan, Glenn Somerville)

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The Financial Services Forum is a non-partisan financial and economic policy organization comprising the CEOs of 18 of the largest and most diversified financial services institutions doing business in the United States.

The purpose of the Forum is to pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.