The Bush administration proposed Tuesday the first comprehensive overhaul of the U.S. financial system in half a century, a plan that would force fundamental changes affecting nearly every American who borrows or saves.

For the first time since the establishment of federal deposit insurance in 1934, government guarantees to bank customers would shrink rather than expand.And, longstanding laws barring commercial and industrial companies from owning banks would crumble, as would the division of banking from the insurance and securities industries.

The proposals, presented by top White House officials, must be approved by Congress.

"Our goal has been to develop practical proposals to reform and strengthen the federal deposit insurance system; modernize our financial system to make banks safer and more competitive, both domestically and internationally; and streamline the bank regulatory structure," Treasury Secretary Nicholas F. Brady said in a letter to Congress accompanying the reform package.

The administration would relax decades-old restrictions on interstate banking within three years, making it easier for giants like Citicorp and Bank of America to establish branches competing with local institutions.

It would prune a thicket of independent regulatory agencies and, in the process, give the administration more control of financial regulation.

Tuesday's recommendations focus on long-term changes whose full effects would not be felt for years. Specific proposals for curing banking's most pressing short-term problem, the weakness of the Federal Deposit Insurance Corp. fund insuring bank deposits, have been postponed.

The fund has been depleted by more than 800 failures over the past four years, and banking trade groups are discussing ways to replenish it without turning to the taxpayers.

Changes in the deposit insurance system are potentially the most far-reaching, although they are crafted to minimize disruption to average depositors.

At the last minute, the Treasury Department backed away from a proposal that would have limited depositors to $100,000 in insurance no matter how many accounts or banks they used.

Instead, the administration advocated a milder version limiting insurance after two years to $200,000 per institution: $100,000 for retirement accounts and $100,000 for other accounts.

As part of the reshuffling, the Federal Reserve would take over the FDIC's responsibilities for regulating state-chartered banks, leaving the FDIC largely an insurance agency.