By Rachelle Younglai and Kevin Drawbaugh

WASHINGTON (Reuters) - A top Senate Republican said on Thursday that setting up a fund to help unwind large troubled firms may perpetrate the assumption that some financial firms will always be rescued by the U.S. government.

"I am not sure creating a fund or a honey pot is the right signal (for) dealing with 'too big to fail'," said Richard Shelby, the top Republican on the U.S. Senate's committee in charge of passing a financial reform bill.

"Some people will think 'gosh that money is going to be there.' It will probably be used for unintended reasons," Shelby said at a banking conference in Washington.

Republican Senator Bob Corker, who had been working with Democrats on a bipartisan bill until talks fell apart, also said such a fund could solidify market perceptions that the government will always save troubled companies.

Corker said Democrats want to codify the U.S. government's Troubled Asset Relief Program, the $700 billion taxpayer fund created during the financial crisis to bail out troubled financial firms such as Bank of America.

Regulators would be able to access the fund at any time to help cover the costs of future government actions to unwind distressed financial firms, Corker said at a National Press Club event in Washington.

Corker said Congress needs to have a role to play in the resolution process.

Shelby and Corker's comments suggest the Republicans will try to amend a provision in the Senate Democrats' bill that sets up a $50 billion fund in case regulators need money to help liquidate a firm.

Next week the Senate Banking Committee is due to start work on the bill crafted by committee chairman Christopher Dodd.

Dodd's bill, which includes new rules for the banking system, derivatives and hedge funds, also tries to ensure that firms will be allowed to fail after the government used billions of dollars in taxpayer funds to prop up firms such as AIG.

Under Dodd's bill, higher capital and liquidity standards would be imposed on large financial firms. Large, complex companies would also be required to submit plans for their rapid and orderly shutdown.

Shelby was unimpressed.

"What we want to do is create some kind of resolution authority to make sure that something goes under, so it's not propped up, so it's not walking dead with a little secretary of the treasury on one arm," Shelby said.

Shelby would not provide details on what he wanted to change or whether Republicans would introduce an alternative bill. Shelby only said he would not support Dodd's bill in its current form.

(Editing by James Dalgleish)