The administration yesterday made its strongest pitch yet to Congress to free financial institutions from restrictions on the services they sell, but said entry into new product territory must be accompanied by stronger federal oversight to guard "the safety and soundness" of the banking system.

In addition to urging that Congress enact comprehensive legislation to "reconsider and clarify the services that banks may offer customers," Treasury Undersecretary George Gould proposed to the Senate Banking Committee specific steps to bolster the funds of the Federal Savings and Loan Insurance Corp., which insures savings and loans.

Gould said FSLIC's reserves, which are strained by record failures among S&Ls, should be increased through levies on the S&L industry's assets and through "prudent borrowing or investment" from the 12 regional banks of the Federal Home Loan Bank Board.

"In effect, FSLIC could borrow against its future stream of assessment and investment income" without making the industry put up right away the several billion dollars that FSLIC needs, Gould said.

The U.S. League of Savings and Loan Associations, a powerful lobby group for the S&L industry, said it is pleased with the Treasury's position.

Gould said Congress should permit banks to sell mutual funds and commercial paper, not only so the banking industry can stay competitive, but also so that consumers and businesses can be offered better, cheaper services.

"We urge the Congress and the regulators to look twice before determining that certain classes of bidders, such as securities firms, cannot be accommodated in some fashion," Gould said.

Gould and Robert L. Clarke, the comptroller of the currency, who also testified at the hearings yesterday, said they oppose closing the loophole that permits limited-service banks -- so-called nonbank banks -- unless Congress also passes laws addressing interstate banking and product and service deregulation.

Nonbank banks, which take deposits or lend money but not both, provide consumers with valuable services and reflect changes taking place in the market, with or without Congress' approval, Clarke said.