* FDIC's Bair says formula fair but Dugan disagrees

* Assessment based on assets, not deposits

* Expected 5-year fund losses revised upward (Adds Dugan comment, details on insurance fund)

By Karey Wutkowski and Patrick Rucker

WASHINGTON, May 22 (Reuters) - Big U.S. banks will shoulder a larger share of restoring the fund that guarantees bank deposits under a measure approved on Friday despite a dissenting vote from a key regulator.

Federal Deposit Insurance Corp Chairman Sheila Bair defended the formula saying large institutions deserved much of the blame for fueling the financial crisis by funding high-risk mortgages.

By a 4-1 vote, the FDIC's board decided to impose a levy of 5 basis points on each institution's assets, minus its strongest capital holdings.

The move modifies a previous decision to charge banks a special fee of 20 basis points based on domestic deposits.

Large lenders like Bank of America (BAC.N: Quote, Profile, Research), Citigroup (C.N: Quote, Profile, Research) and Wells Fargo (WFC.N: Quote, Profile, Research) will pay more under the new formula because they have relatively low levels of deposits as part of their assets when compared with regional banks.