Senate Republicans blocked progress on landmark financial reform legislation for a third day on Wednesday, prompting Democrats to schedule an unusual overnight session to weaken resistance.

A fourth vote on whether to start debate on the bill will be held early on Thursday morning, under the Democrats' plan to pressure Republicans into dropping a procedural roadblock to the most sweeping overhaul of bank rules since the Great Depression.

Meantime, Republicans would have to stay on the Senate floor all night to prevent Democrats from advancing the legislation. A Congressional aide said cots would be brought in for the senators.

On the issues, the distance between the two sides is not huge and a bill is expected to pass eventually.

Republicans object to the scope of the Democrats' measure and were holding out for changes that they said would defend small businesses. One concession they seek, for instance, would protect car dealers from the reach of a proposed consumer watchdog.

With congressional elections set for November, lawmakers from both parties are keen to pass a bill, while banking lobbyists have fought for months to block and weaken reforms.

Democratic Senator Ben Cardin announced the chamber would stay in session through the night to try to move the bill.

We're going to stay here and do this work, Cardin told a hastily called news conference. If Republicans are going to filibuster it, the American people are going to see them filibuster it.

There are not that many weeks left in this session of Congress, Cardin said. Time is running out.

Financial markets are watching how strongly the legislation will crack down on banking and dealing practices, and what that may mean for banks' capital and valuations.

The Republicans floated their first written counterproposal on Tuesday. Analysts described it as extremely similar to the Democratic bill, which has been under development for months in response to the 2008-2009 financial crisis.


Worried about losses in this year's elections, Democrats are keen to take advantage of widespread anger at Wall Street, perhaps the only address more unpopular than Capitol Hill.

Senate Banking Committee Chairman Christopher Dodd told reporters on Wednesday that his 1,558-page bill would not impinge on the ability of small businesses such as auto dealers and dentists to offer installment payment plans.

But an aide said companies that profited from such loans might have to answer to the new consumer watchdog.

Dodd told Reuters after the vote that no decision has been made on the status of a $50-billion fund proposed by Democrats to help pay for dismantling big financial firms in distress. Republicans have demanded that the fund be dropped.

I have people all over the lot on that issue, Dodd said. There is no decision on anything yet.

Dodd's bill would create an orderly liquidation process for unwinding large firms, aiming to prevent more taxpayer bailouts like 2008's rescue of AIG and the shock bankruptcy of Lehman Brothers.

The Dodd bill, as it is, will probably be the bill we move to at some point, said Republican Senator Bob Corker, adding that the measure could be amended to muster bipartisan support once it reaches the Senate floor and is open to debate.


Republican Senator Richard Shelby, who has led the Republican negotiating effort, said on Tuesday that the proposed consumer-protection agency remains the biggest stumbling block.

The Democratic bill would also impose regulations on the unpoliced $450-trillion over-the-counter derivatives markets, curb risky trading by banks, force hedge funds to register with the government and crack down on debt securitization.

Any bill that passes the Senate would have to be reconciled with a version that cleared the House of Representatives in December. Analysts say that could happen by mid-year.

The Republican counterproposal, obtained by Reuters, is the first time the minority party in the Senate has set down its goals on paper during months of closed-door negotiations. It would set up a consumer-protection council, rather than the consumer-protection bureau envisioned by Democrats.

Republicans also want to restrict the Federal Reserve's emergency-lending authority more than Democrats, while allowing national bank regulators to continue to preempt state laws.

In votes on Monday and Tuesday, Democrats fell short of the 60 votes needed to advance bills in the 100-seat chamber. Democrats control 59 seats, one short of the number needed to overcome procedural hurdles.

Republicans say it will be easier to change the bill to their liking before it is brought up for debate, where Democrats only need 50 votes to defeat their proposal.

Once this bill does get to the floor, we all recognize that it will be very, very difficult to change it, said Republican Senator Mike Johanns.

(Additional reporting by Tabassum Zakaria and Thomas Ferraro, Editing by Chizu Nomiyama)