Democrats in Congress were negotiating a “letter of assurances” with President-elect Obama’s economic team late Sunday to avoid a political battle over the release of the next $350 billion of funds in the Troubled Asset Relief Program, or TARP, Congressional and financial industry sources said.

If the president-elect approves the letter, the Bush Administration will begin the process of seeking the TARP funds, the sources said. Mr. Obama could agree to the letter -- and the Bush Administration could start the process -- as early as Monday, the sources said.

The letter includes provisions that would loosely commit the Obama administration to use TARP funds to help troubled homeowners avoid foreclosure; to adopt tougher executive compensation limits and corporate governance standards for firms that participate in TARP, and increase reporting, oversight and disclosure requirements in the program.

The letter would allow the president-elect and Congressional Democrats to avoid a potentially embarrassing veto fight in Mr. Obama’s first weeks in office. The Treasury has spent or committed all of the $350 billion funding in the first half of the $700 billion TARP. To get authorization for the last $350 billion, the president -- Bush now, or Obama after he takes office -- must submit a report to Congress outlining how the Treasury would spend the money. The funding will be authorized automatically unless Congress votes to approve a “resolution of disapproval” within 15 days of receiving the report.

But the president could veto the resolution. Then to stop the funding, Congress -- controlled by the president-elect’s own party -- would have to override the veto with a two-thirds vote in the House and Senate.

While sources believe the next $350 billion will come regardless of how the process unfolds, a veto and effort to override it “would set up quite a mess the first weeks in office” for Mr. Obama, a financial industry source said. “That would be a disaster politically.”

On Capital Hill, Sen. John Kerry (D-Mass.), who attended a meeting Sunday with fellow Democrats and a member of the Obama economic team, former Treasury Secretary Larry Summers, said Summers "made a very strong argument for why the additional [TARP] funds are critical for the overall economic recovery."

Kerry said he expected Mr. Obama "to make a judgment or determination in the next hours" about timing of the TARP request. He said the president-elect "will make it clear what he wants."  The senator also said he expects Bush Administration to make the TARP request “very soon.”

The provisions of the proposed letter mirrors legislation introduced by TARP critics in the House and Senate last week, sources said. Members of both parties have been angered by the Bush Administration’s management of the program, which was approved by Congress in October. In particular, critics say the administration has not taken more aggressive steps to help prevent mortgage foreclosures.

While Mr. Obama and many members of Congress agree in general to changing the TARP strategy -- both the president-elect and Congressional Democrats want more help in TARP for struggling homeowners, for example -- the source said the president-elect and his nominee for Treasury Secretary, Tim Geithner, the president of the New York Federal Reserve Bank, do not support legislation that might lock them in to specific TARP spending and other new requirements.

The concern is that such legislation would reduce the Obama Administration’s control of TARP funds and flexibility in managing the program. Such requirements, such as tougher executive compensation rules that are retroactive, could also give financial institutions less incentives to participate or stay in the program, the source said.

But Congressional sources said that without at least a letter from the Obama economic team assuring them of a new approach with TARP, critics will introduce the disapproval resolution -- and the House and Senate will pass it, setting up the veto skirmish. Even with the letter, the House, at least, will likely consider separate legislation imposing new guidelines in TARP, they said, if only to give members more political cover to continue with a program that polls show most taxpayers don’t favor.

Using a line originally made famous by President Ronald Reagan, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told reporters Friday after introducing a bill to redraw TARP: “We intend to trust but verify.”

Spokespeople for the Obama transition did not respond to a request for comment. But in a television interview Sunday, the president-elect said he had asked his economic team to develop a set of principals for the next phase of TARP spending.

“I think that when you look at how we have handled the home foreclosure situation and whether we’ve done enough in terms of helping families on the ground who may have lost their homes because they lost their jobs or because they got sick, we haven’t done enough there,” Mr. Obama said.