By Richard Cowan and John Poirier
WASHINGTON (Reuters) - President-elect Barack Obama sent top economic advisers on Tuesday to push skeptical lawmakers to release $350 billion in financial rescue funds and avert a showdown that could unsettle Wall Street.
In the first big test of how he will work with Congress and tackle opposition from within his own Democratic party, Obama sent Lawrence Summers and other aides to a closed-door meeting with members of the powerful Senate Finance Committee.
Obama -- who takes over from President George W. Bush on January 20 -- was himself set to meet later in the day with Senate Democrats.
"It's very, very important that we be in a strong position on financial recovery," Summers, who will become director of the White House National Economic Council, said after meeting with committee members.
At Obama's request, Bush formally asked on Monday for the second half of the $700 billion bailout fund, starting a 15-day countdown for Congress to reject it or let the money flow. A vote could come as early as Thursday.
Democrats and Republicans alike have complained that there was too little transparency into how the government doled out the first half of the cash, approved amid a disastrous credit crisis last year. They have demanded more details from Obama before the remaining money is released.
Some Republicans are reluctant to promote more government intervention in the economy, while many Democrats have focused their objections on how the first $350 billion has been handled.
Illinois Democrat Sen. Dick Durbin said winning Senate approval for releasing the money would be "challenging" and a top Republican said there were enough votes to block it.
If that happens, Obama could overturn their decision with a veto after he takes office on January 20. Congress would then need to muster a two-thirds majority to override it.
"It's a high hurdle to clear," Tennessee Republican Sen. Lamar Alexander said in an interview, referring to the two-thirds majority.
That would certainly not be an ideal start to Obama's presidency, and his economic aides were keen to quell the opposition before a vote.
A congressional fight would also add to uncertainty among investors who are eager for a clearer sense of how Washington intends to combat the financial turmoil and recession that now is in its second year.
OPPOSITION BUILDS
So far, most of the initial $350 billion has gone to buy stakes in banks instead of purchasing bad assets as the plan was originally pitched to do. Lawmakers have accused the Treasury Department of handing over the cash with too few conditions on how it would be used, leaving banks free to hoard public money.
"The American people still don't have assurances that this money will not be wasted or misused to play favorites," Senate Republican leader Mitch McConnell said.
McConnell said Obama could expect a "receptive, if cautious, audience" when he makes his case for tapping the remaining money.
Obama's administration picked up some support from U.S. Federal Reserve Chairman Ben Bernanke. Bernanke warned on Tuesday that banks may need more capital from the government and said the economy cannot recover until the financial sector is stabilized.
Bernanke, speaking at a conference at the London School of Economics, floated the idea of setting up a "bad bank" to buy up troubled assets that firms are struggling to value or sell, similar to the original financial rescue plan.
"Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt," Bernanke said.
Neel Kashkari, the Treasury Department official who is in charge of administering the $700 billion rescue program, said thousands more financial firms were lining up for government cash, but it would take time for the investments overall to ease lending conditions.
In a sign that banks remain under strain despite trillions of dollars in government lending and guarantees, Citigroup Inc shares slipped to their lowest level since the company won a government rescue in November, as investors braced for heavy fourth-quarter losses.
(Additional reporting by Kevin Drawbaugh, Donna Smith, Thomas Ferraro and Jeremy Pelofsky; Writing by Emily Kaiser, editing by Philip Barbara)
