The Treasury unveiled its long-awaited plan to overhaul the financial industry yesterday, pledging to make U.S. banks more competitive and vowing to narrow the "safety net" of deposit insurance in order to protect taxpayers from paying for costly bank failures.

In the most sweeping banking package put forward in half a century, the Treasury is proposing to tear down barriers to interstate banking, permit the ownership of banks by commercial and industrial businesses and widen bank powers. It also seeks to streamline regulatory agencies and pare back deposit insurance for the first time since it was instituted during the Great Depression.

If enacted by Congress, the package will lead to a more profitable, more secure banking industry that could compete better with international giants and offer consumers a wider range of financial services, the Treasury said.

The package also could accelerate the consolidation of the banking industry and clear the way for banks to offer new services and to enter territory once reserved for insurance companies and securities houses. Eventually, it may prompt wealthy individuals to reassess where they keep their money.

"We must modernize our banking laws to deal with the reality of the marketplace, not just for the banks but for the country," Treasury Secretary Nicholas F. Brady said yesterday, declaring that his plan would be a centerpiece of the Bush administration's domestic policy agenda.

But Treasury legislation, to be introduced later this month, faces a tough fight on Capitol Hill, where lawmakers are wary of giving banks new powers in the wake of the savings and loan debacle and nervous about tinkering with laws that date from the Franklin D. Roosevelt administration. In addition, many lawmakers are fearful of invasions by big money-center banks and protective of small community banks in their own constituencies.

Despite extensive lobbying by Treasury officials over the past several weeks, the plan drew fire from key lawmakers. Rep. John D. Dingell (D-Mich.), the chairman of the House Energy and Commerce Committee who has killed bank reform legislation before, called the administration plan "bad medicine for banks and poison for the American public." Even a Bush administration ally, Rep. Jim Leach (R-Iowa), said he had "grave doubts" about elements of the package.

The Treasury also faces formidable foes outside Congress, who may pick at different parts of the package. For example, Treasury officials privately expect former Federal Reserve Board Chairman Paul Volcker to oppose the lowering of barriers between banks and other businesses. {For reaction to the plan, see article on page B1.}

Nonetheless, Brady said yesterday that he hoped legislation could be passed by mid-summer, saying that it did not take a "rocket scientist" to recognize that it was "common sense stuff." Brady said that new types of financial services and technologies introduced in the 1980s had made existing banking laws obsolete. "There is very little similarity between the laws on the books and the way American people bank," he said.

Brady also said that changes were needed in the banking industry to keep American banks among the world's largest. He repeatedly cited figures showing that over 20 years eight U.S. banks had slipped off a list of the world's 30 biggest banks.

The Treasury plan comes at a time when Americans lack confidence in the nation's banks and savings institutions. A Washington Post survey shows that 49 percent of Americans have "very little" confidence in savings and loans, and 58 percent said they have "some" or "very little" confidence in banks generally.

The Treasury report grew out of of the 1989 savings and loan bailout legislation, which required the department to study the deposit insurance system. The sketchiest part of the Treasury report, however, dealt with deposit insurance, setting out only long-range goals.

The administration said it wants to scale back deposit insurance, which currently provides government guarantees for all accounts up to $100,000. The report said that even after adjusting for inflation, the amount of each account covered by government insurance had jumped four-fold since 1934, when the program began.

The Treasury plan would phase in a rule that would prevent individuals from having more than $100,000 in insurance at a single institution, plus an additional $100,000 in deposit insurance for retirement accounts. That limit would take effect over two years and would affect people with multiple accounts at a single institution.

Eventually, the Treasury would limit deposit insurance to $100,000 per person nationwide, plus another $100,000 per person for retirement purposes.

The measure would affect the 5 percent of American households that currently keep more than $100,000 in bank accounts. But if those depositors decide to reinvest their money elsewhere, it could have a wider impact. A Treasury official estimated that those households could account for as much as 25 percent to 30 percent of all bank deposits.

The more far-reaching cap on government guarantees for deposits would await the results of an 18-month study by the Federal Deposit Insurance Corp. FDIC Chairman L. William Seidman declined to comment on the plan.

The Treasury will also recommend the abolition of brokered deposits, rapidly shifting packages of deposits that encouraged interest rate bidding wars between thrifts during the 1980s. It also plans to eliminate federal deposit insurance for pension fund deposits.

Other highlights of the 648-page, 3.8-pound report include:

Permission for industrial and commercial companies to own banks. This would do away with restrictions contained in the landmark Glass-Steagall Act of 1934, but it would set up "fire walls" between a commercial company and its banking affiliate. Brady noted that many commercial firms were already entering insurance and financial services and argued that commercial businesses could provide banks with needed capital.

Doing away with barriers that prevent banks from doing business or opening branches across state lines. "A California bank can open a branch in Birmingham, England, but not in Birmingham, Ala.," Brady said.

Rewarding well-capitalized banks with the power to diversify into other financial services. Regulators' power to limit dividend payments and remove bank officers would grow as a bank's capital dwindles, even before the institution became insolvent.

Some critics said that the ailing banking industry would land in deeper trouble by expanding into new areas of business, but the Treasury report asserted that "recent problems in the banking industry are not the result of exotic new activities; instead, they are the product of traditional bank lending to traditional customers."

Revamping regulatory agencies. "No one creating a regulatory system today from scratch would design the current structure," the report said. It would give regulatory power to two bodies, instead of the current four. The Federal Reserve would oversee state-chartered banks and their holding companies while a newly created Federal Banking Agency, under the Treasury, would oversee federally chartered banks. The FDIC would lose much of its regulatory role and the Office of the Comptroller of the Currency would be abolished.

Many members of Congress want assurances that taxpayers will not be asked to bail out the depleted FDIC fund, which guarantees commercial bank deposits. But the Treasury did not take a position yesterday on how to replenish the fund.

Staff writers Stan Hinden, Susan Schmidt, and Joe l Glenn Brenner contributed to this report.