WASHINGTON, DC - The government should have the authority to break up or reconstruct financial firms before they become "too big to fail," a prominent U.S. lawmaker said on Tuesday.

The House Financial Services Committee is expected to start crafting legislation this week that would give the government a way to see all aspects of the financial system and unwind large troubled financial firms.

Paul Kanjorski, chairman of the financial services subcommittee on capital markets, said he would introduce an amendment to the draft bill to prevent firms from becoming a threat to the wider economy.

Kanjorski said financial firms should be reconstructed before they pose a risk to the financial system and the economy. He said breaking up firms was not the objective, as long as they do not reach the threshold of being deemed too big to fail.

"We have to find a way of limiting firms from becoming too big to fail so they don't capture the government," he told reporters.

Kanjorski's potential amendment will face deep resistance from large financial services firms.

"The fundamental error of such an approach is the presumption that large is somehow bad," said John Dearie, executive vice president at the Financial Services Forum, a group of financial services firm chief executives.

"To be a global player, able to serve the financial needs of globally active clients, requires size, diversity of activities, and expertise in many countries around the world. That requires institutional heft," he said.

In London, some financial firms that were propped up by the government will be partially broken up. Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) was forced to sell chunks of its retail bank to meet European state aid rules. Lloyds Banking Group (LLOY.L: Quote, Profile, Research, Stock Buzz) will have to dispose of a retail banking business with at least 600 branches. (Reporting by Rachelle Younglai; editing by John Wallace)