By John Poirier

WASHINGTON, May 12 (Reuters) - Democratic Senator Richard Durbin plans to introduce a measure allowing retail stores and restaurants to offer discounts to customers who pay with cash instead of a credit card.

The measure is expected to be introduced in the Senate during debate on credit card reform legislation offered Monday by Senate Banking Committee Chairman Christopher Dodd.

Legislative efforts are aimed at stopping credit card companies from imposing certain late fees, restricting retroactive rate increases, as well as other questionable billing practices and marketing to minors.

With the backing of the committee's top Republican, Richard Shelby of Alabama, the full Senate is expected to pass Dodd's bill that allows credit card issuers to raise rates on balances that are 60 days late.

The controversial issue centers on fees, called "interchange" fees, charged to merchants by banks for using the payment system provided by Visa Inc (V.N: Quote, Profile, Research) and MasterCard Inc (MA.N: Quote, Profile, Research). American Express Co (AXP.N: Quote, Profile, Research) provides merchants with its own payment system.

It is at the heart of long-running dispute between banks and merchants who pay on average a 2 percent fee on credit card transactions.

Durbin, an Illinois Democrat, said an establishment should be allowed to offer a discount if a customer pays by cash, check or a debit card to counter what he called a "hidden inflaters" in the cost of products paid by credit cards.

"I don't think that's unreasonable," Durbin said on the Senate floor.