WASHINGTON — After more than a week of escalating partisan rhetoric over regulatory reform, Senate Republican leaders significantly changed their tone on Tuesday, suggesting a bipartisan bill was now within reach.

Although Democrats and Republicans continue to disagree over whether talks ever really broke down, lawmakers from both parties said they were making progress in narrowing their differences.

"Serious discussions have resumed," Senate Minority Leader Mitch McConnell told reporters. "We're hopeful that Democrats and Republicans on the Banking Committee plus those involved on the Agriculture Committee on the derivatives piece can come together and give us a... truly bipartisan bill that we can move across the floor of the Senate. But at least the process to achieve that has now been reconstituted, if you will."

His positive remarks were echoed by Sen. Richard Shelby, the Banking Committee's senior Republican, who is trying to broker a compromise with Chairman Chris Dodd.

"We are making progress," he said. "I believe that we are going to get us a bipartisan bill... We are probably not that far away. There's a lot of tedious and difficult negotiations going on still, but I think we can get there."

Shelby appeared less concerned the bill would perpetuate too big to fail. For example, he said that giving the Federal Reserve Board oversight of large, complex organizations would not necessarily signal to the markets that such firms are backed by the government.

"I don't think so," Shelby said when asked if Fed regulation would indicate too big to fail. "We hope that we end that. I pray that we do."

The Alabama Republican also agreed with conventional wisdom that a proposed $50 billion fund to resolve systemically important firms will be dropped.

The provision has become the key focal point in recent days for GOP members that argue the bill would continue to allow government bailouts.

"We are not going to have that. I don't believe we are going to have a fund in place," he said.

Still, Shelby said he continues to seek tighter resolution language to ensure that no failing bank could be propped up.

"There are a lot of concerns, but I think the overriding issue on too big to fail is to make sure the language is as tight as it can be to send the unambiguous message that no bank is going to be bailed out in the future," Shelby said.

But he backed off of other potential concerns. In a letter to Treasury Secretary Tim Geithner last month, Shelby had said he had misgivings about allowing the Fed to decide what collateral would be accepted for central bank lending. By Tuesday, however, he said he agreed it "needs some flexibility."

"I believe the Fed needs some leeway in some areas," he said.

Shelby also indicated that there was progress on reaching a bipartisan agreement to regulate derivatives.

"We think we are on the right track," he said. "We think we are close with where they are today."

Senate Agriculture Committee Chairman Blanche Lincoln has introduced a tough derivatives bill that would force banks to spin-off their swaps units. The bill is on course for a committee vote Wednesday but any bipartisan agreement would likely be significantly different.

Shelby said that derivatives, ending too big to fail and consumer protection remain the central focus in the discussions.

Acknowledging the fragility of the talks, Dodd was cagey Tuesday about getting into specifics. He told reporters he had spoken to Shelby in the morning and planned to meet with him later in the day.

But he, too, expressed confidence a bipartisan deal could be reached.

"Listen, it's up to them," he said. "You can do this any number of different ways. I'm not going to negotiate away basic principles in the bill — that's not going to happen. There are items which are negotiable in my view that I'm prepared to listen to and work on if we can to bring people on board."

He said both sides appear to be making progress.

"We are getting closer to the possibility of having a bill that will attract bipartisan support," Dodd said.

Still, Dodd said he was planning to move as fast as possible to pass a bill, and would not let negotiations unnecessarily delay the process.

"One thing is clear. I'm going to go forward," he said. "The bill is going to be on the floor. … I've always been fairly optimistic that we can end up with a bill. I just don't want to measure my optimism one way or another in the absence of getting something."

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