LONDON (Reuters) - US Treasury Secretary Henry Paulson said yesterday that the United States must strengthen its process for regulators to unwind failing investment banks without threatening the stability of the financial system.

Adding some flesh to his plan for the Federal Reserve to take a broader regulatory role, Paulson said his first priority was to maintain market stability amid the current turmoil, but he wants to move quickly to address regulatory deficiencies exposed by the credit crisis which began nearly a year ago.

"In my view, looking beyond the immediate market challenges of today, we need to create a resolution process that ensures the financial system can withstand the failure of a large, complex financial firm," Paulson said in remarks prepared for delivery to the Chatham House think tank in London.

"To do this, we will need to give our regulators emergency authority to limit temporary disruptions. These authorities should be flexible and — to reinforce market discipline — the trigger for invoking such authority should be very high, such as a bankruptcy filing," he added.

He said the perception should be avoided that an institution is "too interconnected to fail or too big to fail" and added that "we must improve the tools at our disposal for facilitating the orderly failure of a large, complex, financial institution".

On the final leg of a five-day trip to Russia, Germany and Britain to discuss trade and economic issues, Paulson met in London Prime Minister Gordon Brown, finance minister Alistair Darling, Financial Services Authority Chairman Callum McCarthy and Conservative Party Leader David Cameron.

Paulson's remarks, made available in advance, come amid debate over what additional regulation is needed in the wake of a rescue of Wall Street investment bank Bear Stearns.

In March the Fed helped engineer a takeover of Bear Stearns by JPMorgan Chase & Co. (JPM.N) and guaranteed a $29 billion loan to facilitate the transaction out of concern that a Bear Stearns bankruptcy could trigger a financial panic. It also started making emergency loans to investment banks for the first time since the Great Depression.

Paulson last month said the Fed should be given permanent authority as a "market stability regulator" to make liquidity available to a broader range of financial institutions under certain circumstances if the financial system's stability is threatened.

But an "orderly" failure of a major Wall Street institution is a tall order.

"These things are always going to be messy. When you get a major investment bank going under, it's a huge news event that's going to be disruptive," said Alan Ruskin, chief international strategist for RBS Greenwich Capital Markets in Greenwich, Connecticut.

"The question is whether you can have a mechanism that allows them to fail if need be in a way that is not extraordinarily disruptive," he said.

Paulson called for a flexible approach that allowed authorities to provide government support focused on areas with the greatest potential for market instability, but said a government backstop should not go too far.