A Bush administration proposal to allow interstate branching - long a dream of big banks - could turn into a nightmare on Main Street for operators of small-town banks.

The plan, included in the administration's landmark banking reform package, has highlighted a deep rift dividing the banking industry into two camps.Big money center banks and super-regional institutions tend to favor the proposal, which would effectively bring to an end the McFadden Act, a Depression-era law prohibiting interstate banking by national banks.

But smaller, community-oriented banks contend the plan will pave the way for their large and well-capitalized competitors to roll into local markets.

The interstate branching proposal, already raising some eyebrows on Capitol Hill, was designed to help modernize the U.S. banking system and to boost its competitiveness with foreign banking companies.

Sen. Richard Shelby, D-Ala., and a member of the influential Senate Banking Committee, recently said the proposal appears to favor larger banks at the expense of smaller institutions.

"It's true that our big banks need help, particularly the money center banks," Shelby said. "But I do not believe that help should come at the expense of the community banks in the country."

The Treasury Department said nationwide branching would lead to safer, more efficient and more competitive banks. It pointed out the United States is the only major industrialized country in the world without a truly national banking system.

Treasury Secretary Nicholas Brady said the nation needs to update what he termed "antiquated" laws prohibiting interstate banking.

"Banks in California, Michigan and Utah can open branches in Birmingham, England, but not in Birmingham, Alabama," Brady told the Senate Banking Committee recently.

"These laws, mainly enacted in the 1920s and '30s, are wholly out of touch with reality, and impose unnecessary costs on banks and consumers - costs that have been estimated at $10 billion annually," Brady said.

Today's banking customer is as apt to use an automated teller machine or to transfer money electronically as yesterday's customer was to know the name of the local bank president.

Brady said allowing interestate banking should be among the first steps Congress takes to improve the health and competitiveness of the U.S. banking system.

So far, 33 states have adopted nationwide banking laws, but that still leaves the United States with a patchwork quilt of regulations. The Bush administration's proposal would bring nationwide banking to all 50 states within three years.

The change would apply initially to federally chartered banks because Congress has no authority over state chartered institutions.

James Watt, president of the Conference of State Bank Supervisors, called the administration's plan "Wall Street's dream and Main Street's nightmare."

"The net result will be a transfer of capital from local markets to Wall Street, where the elite few have access to credit but local businesses and individuals don't," Watt said.

Watt said states, rather than the federal government, should direct the development of nationwide banking.

"We cannot overstate the threat this proposal presents to state banks," he said.

Jack Dickey, president of The First National Bank, of Thomas, Okla., and a member of the Independent Bankers Association of America, agrees the proposal appears to have a bias toward large, powerful banks.

Dickey fears interstate branching could lessen the availability of credit to farmers and other small-town businesses because loan decisions that once had been made locally could now be made at the bank's corporate headquarters.

Sen. Phil Gramm, R-Texas, and a member of the Senate Banking Committee, appeared to side with Dickey and the plight of small bankers at a recent committee hearing when he raised the ghost of a fellow statesman.

"In Lyndon Johnson's old words, I'd like a banker who knows when I'm sick and cares when I die," Gramm said, echoing the former president from the rural hill country of Texas.