At issue is the Transaction Account Guarantee (TAG) program, which insures all bank deposits in checking accounts above the $250,000 coverage already provided by the Federal Deposit Insurance Corp.

TAG primarily benefits businesses and local governments that need quick access to large amounts of cash for payroll and other needs.

About $1.3 trillion of TAG-insured deposits that do not pay interest sit at large and small U.S. banks.

The TAG program was created by bank regulators and the U.S. Treasury during the 2008 financial crisis to attract cash for banks and reassure depositors that their money was safe. In 2010, Congress extended the TAG program through the end of 2012.

Without another extension, businesses are likely to shift their deposits to prime money-market accounts and other short-term alternatives.

"This program is the best deal around," said Robert Haas, senior treasury associate in charge of cash management and investments at the National Railroad Passenger Corp., the parent of Amtrak.

It addresses treasurers' two primary concerns: safety and a return on cash that comes from discounts banks give on other services in lieu of interest, he said.

If the program disappears, he will look at other options, Haas added.

A LIFELINE FOR SMALL BANKS

While the 10 largest U.S. banks hold 70 percent of TAG deposits, small banks have benefited by attracting deposits from local borrowers to fund loans that previously went to bigger banks, which are seen as safer. Community banks with under $10 billion of assets hold about $200 billion of TAG deposits - or about $23 million per bank.

"Extending TAG is our No. 1 priority this year," said Camden Fine, president of the Independent Community Bankers of America, who insists that business lending in distressed communities depends on the program. "Ending it will have a crippling impact on any kind of full economic recovery."

The ICBA seeks a five-year extension of the program.

A bipartisan group of legislators have told constituents in the community banking world that they support the banks, but an extension is by no means certain.

The U.S. government is trying to exit many of the emergency financial programs set up during the crisis.

Time is not on the bankers' side on this issue. Only about three weeks of legislative days are left to craft an extension of the TAG insurance program before the presidential election.

Banking industry lobbyists said the best possibility is to attach a TAG extension to a bill that seems certain of passage. That bill has not yet been determined, they said.

Exacerbating the problem is that banks are feuding among themselves over the program.

Many large banks are concerned that small banks are winning deposits by assuring customers their funds are completely safe. If these banks end up failing, big banks could have to pay more money into the FDIC insurance fund. Banks are not currently charged an additional assessment on TAG deposits, but that could well change.

When directors of the American Bankers Association, a powerful trade group representing large and small banks, convened earlier this month, it was a tossup as to whether they would support a TAG extension, said people familiar with their thoughts.

By the end of the meeting, they voted almost unanimously to seek a two-year extension.

"The tipping point was new uncertainty about the economy," said James Chessen, the ABA's chief economist.

Bank executives have become spooked about a recent decline in customer loan demand due to burgeoning concerns about the euro-zone crisis, the potential year-end budget-and-tax battle known as "fiscal cliff" and new signs of a slowing U.S. economy. Extending TAG eliminates at least one element of year-end uncertainty for them, Chessen said.

WHO NEEDS IT?

Many analysts shrug their shoulders at the controversy.

Big banks don't need the cash. They have fixed the liquidity problems that plagued them during the financial crisis and cannot invest or lend their excess deposits at a rate that benefits shareholders.

"Banks don't want this money because there is nothing they can do with it," said Richard Bove, an analyst at Rochdale Securities.

Bank of New York was so awash in deposits last summer that it threatened to charge companies with more than $50 million in deposits to offset the fees the bank pays to the FDIC. The bank retreated from the plan but is now considering charging European clients who are flooding it with eurodeposits, Chief Financial Officer Todd Gibbons told Reuters this month.

Noninterest-bearing client deposits at Bank of New York totaled $63 billion at the end of the second quarter - 46 percent higher than year-ago levels.

The FDIC is "neutral" on an extension, according to a spokesman.

Last month, acting FDIC Chairman Martin Gruenberg told the U.S. House subcommittee on financial institutions and consumer credit that the TAG program has not had a big effect on depleting the deposit insurance fund. But he declined to speculate on how ending the program would affect banks or the economy.

FIGHTING WORDS

Bankers, meanwhile, are anxious about their lobbying efforts. They worry that credit unions, which have long been fighting to expand their ability to make business loans, will piggyback extended powers into TAG legislation.

"The senators we talk to think that marrying TAG, which the banks really want, with the Member Business Lending bill that we are lobbying for, would work," said John Magill, executive vice president of the Credit Union National Association, the chief trade group for credit unions. "TAG will not end up passing unless MBL is passed because we have been promised votes in the House and Senate. The banks don't have a bill or a vehicle to attach one to."

Representatives of the ABA and the ICBA said they adamantly oppose a deal that would give credit unions more lending latitude in exchange for a temporary extension of TAG.

"Credit unions have been wearing out their welcome in Congress by trying to attach their highly controversial legislation like a barnacle to any moving legislation," said Paul Merski, executive vice president for congressional relations at ICBA, the community banking trade group.

"They again would be the skunk at the garden party here on a needed TAG extension."

(Additional reporting by Tim McLaughlin; Editing by Jan Paschal)

• A Permanent Economic Emergency