By Kevin Drawbaugh

WASHINGTON (Reuters) -- The U.S. Treasury Department will clamp down further this week on corporate income tax-avoiding "inversion" deals by U.S. companies with foreign rivals, according to a letter seen by Reuters on Wednesday.

With a major inversion deal in the works between U.S. drug maker Pfizer Inc and smaller Irish competitor Allergan Plc, Treasury's move will be its latest to curb such transactions and protect the U.S. corporate tax base.

Inversions typically involve a U.S. multinational buying a smaller foreign competitor and relocating to its home country, if only on paper, to escape U.S. taxation. Ireland is a common destination. Management usually stays in the United States.

In the letter, Treasury said: "Later this week, we intend to issue additional targeted guidance to deter and reduce further the economic benefits of corporate inversions."

Details were not spelled out in the letter, signed by Treasury Secretary Jack Lew and addressed to four senior lawmakers: U.S. Senators Ron Wyden and Orrin Hatch, and Representatives Kevin Brady and Sander Levin. All four serve on the Senate and House tax committees.

"We have no further comment beyond what’s in the letter, at this time," a Treasury spokesman said.

Levin said in a statement: "The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend."

Noting that Treasury can only do so much on its own, Levin urged Congress to "get off the sidelines and take action to change the law to stop these tax-motivated inversions."

As a wave of inversions peaked in September 2014, Treasury took several regulatory actions to reduce the tax benefits of inverting, while also making new deals more difficult. That slowed deal flow but did not stop it entirely.

For months tax experts have speculated about what could come next from Treasury. Possible steps might include tightening the rules on two strategies related to inversions, tax experts said: so-called "earnings stripping" and "skinny down" distributions.

Earnings-stripping rules combat shifting of U.S. profits out of the country to low-tax jurisdictions. Treasury has struggled to write new rules on this under present law, said tax experts.

Rules targeting skinny-down distributions are meant to keep U.S. companies from shrinking their operations ahead of inversions to evade standards for minimum levels of foreign ownership in inverted companies.

Shares in Allergan were down 5 percent in late trading. Spokespersons for Pfizer and Allergan declined to comment.

(Additional reporting by Mark Roumeliotis in New York,; Editing by Eric Walsh and Ken Wills)