By Patrick Rucker

WASHINGTON, July 6 (Reuters) - The U.S. Treasury Department is warning the financial services industry that it will not back down from its proposal to create a new consumer protection agency, even while lobbyists build a warchest and strategy to defeat the plan.

The new agency, part of a wider revamp of U.S. financial rules proposed by the Obama administration, would have the power to regulate products like mortgages and credit cards in what advocates have likened to a safety commission for financial products.

The proposal, detailed in a 152-page draft bill sent to Congress last week, has drawn fire from financial service companies, but it has also galvanized consumer groups, setting the stage for a tough legislative battle.

On Thursday, a senior Treasury Department official told members of the American Bankers Association that President Barack Obama is committed to the Consumer Finance Protection Agency and will fight for its passage through Congress.

Michael Barr, Treasury assistant secretary for financial institutions, told ABA members the current regulatory system "has failed to protect the American people and needs to be fixed in a fundamental way," said one person who heard the call.

Officials hope that a new system of regulation will discourage the kind of high-risk lending that spurred a runaway housing market for five years and ended in the current bust of record foreclosures.

Mortgages with low early payments were popular in once-hot housing markets, but many home buyers could not shoulder the hidden costs of those loans.

"Our society has a system to protect us from exploding toasters, but not exploding interest rates," said Brian Kettenring of Acorn, a national community organization.