To appease critics of its sweeping financial reform package, the Treasury Department is offering to prohibit mergers among bank holding companies and the largest 1,000 nonfinancial corporations.

The proposal comes as the Clinton administration faces increasing pressure from opponents of cross-industry mergers, such as Sen. Paul Sarbanes, the Senate Banking Committee's ranking Democrat, and House Banking Committee Chairman Jim Leach.

Edward L. Yingling, chief lobbyist for the American Bankers Association, said Treasury's compromise may break the logjam.

"We have encouraged them to look at various options," he said. "This is a very valuable addition to the discussion."

But other supporters of financial reform said they were dismayed by Treasury's suggestion.

"Why are they doing this?" asked James Spellman, spokesman for the Securities Industry Association. "By excluding the top 1,000 companies, they will be creating another group of people opposed to legislation."

Sen. Sarbanes and others fighting any mixing of banking and commerce appear unlikely to budge.

"This would be a totally unacceptable breach in the wall separating banking and commerce," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, which represents small banks.

Mr. Guenther argued that Treasury's new idea still would allow large regional banks to dominate local economies.

As an example he cited Arkansas, where he said Minneapolis-based Norwest Corp. could acquire four companies with $2.3 billion in revenues, including Riceland Foods Inc. and American Freightways Corp.

"This is anticompetitive and would totally destroy the impartial allocation of credit," Mr. Guenther said.

While Treasury officials declined to comment Tuesday, industry and congressional sources said the 1,000-company cutoff is arbitrary. Even with the largest firms off-limits, Treasury's plan would cap-perhaps at 25%-the revenue banking companies could earn from investments in nonfinancial businesses.

The approach is similar to that of Rep. Marge Roukema, R-N.J., whose bill would allow holding companies to garner 25% of their "business" from commercial investments.

Congress gave the Clinton administration until March 31 to weigh in on financial reform. Having passed the deadline, Treasury officials are looking for an acceptable compromise.

Lacking administration support, congressional efforts to move financial modernization legislation are losing steam.

Rep. Leach scrubbed a hearing this week at which Treasury Secretary Robert E. Rubin was scheduled to testify. Rep. Michael Oxley, chairman of House Commerce's finance and hazardous materials subcommittee, canceled a hearing on financial reform scheduled for Thursday.

Coordinated by Sen. Sarbanes, a variety of small-business, labor, and activist groups have been urging the White House to reject Treasury's proposal.

The opponents argue that cross-industry mergers would lead to massive concentration of economic resources and put federal deposit insurance funds at risk.

By prohibiting mergers between banks and the largest nonbank companies, Treasury hopes to quell those arguments.

"They are trying to cobble together enough support and get a plan that can be passed," said Samuel J. Baptista, president of the Financial Services Council, which represents diversified financial firms.

Treasury Under Secretary John D. Hawke Jr. has repeatedly argued that barriers between banks and nonfinancial organizations are out of date because commercial firms are already massive players in the credit markets.

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