By David Morgan

WASHINGTON (Reuters) - Business groups urged the Obama administration on Thursday to drop or revise its latest proposals to discourage U.S. companies from rebasing overseas in search of tax savings, part of a long-running fight over so-called tax inversion deals.

The tax avoidance strategy has been attempted in recent years, with mixed results, by some notable U.S. multinationals, including Pfizer Inc and Medtronic Inc..

The latest wave of inversions largely ended after the Treasury Department said on April 4 it was moving to make the deals less lucrative by closing off one of their main attractions, "earnings stripping" transactions.

That is a strategy used by multinationals to shift taxable U.S. profits abroad through tax-deductible interest payments to a foreign parent. Doing an inversion makes this easier.

At a public hearing hosted by the Internal Revenue Service on the new anti-earnings stripping proposals, business representatives said they were too broad and would disrupt ordinary business operations, while discouraging foreign investment in the United States.

"The damage dwarfs the benefits," said Pam Olson, a former Treasury official who works for Big Four audit and consulting firm PricewaterhouseCoopers.

Days after Treasury announced its new earnings stripping curbs and other steps meant to combat inversions, drugmaker Pfizer ended a $160-billion agreement to acquire Allergan Inc and move to its home country of Ireland.

The Treasury hearing could be the last chance for the public to comment on the department's proposals, soon to be finalized.

An inversion is a deal in which a U.S. company buys a smaller, foreign rival and reincorporates in its headquarters country. Earnings stripping occurs when a former U.S.-based company shifts taxable U.S. earnings to its new foreign parent through debt interest payments that are tax deductible in the United States and subject to a lower income-tax rate overseas.

Because inversions threaten to erode U.S. government tax revenue and increase the federal deficit, Treasury and IRS officials have proposed recharacterizing those interest payments into equity dividends, which are not tax-deductible.

During the official public comment period for the proposed regulations, corporations including banks and manufacturers warned that the changes would play havoc with intercompany loans and other cash management measures intended to keep day-to-day operations moving smoothly.

On Thursday, witnesses told officials from the Treasury and IRS that the proposed rules could also affect the status of companies organized as pass-throughs that are required by potentially creating an illegal class of equity.

(Reporting by David Morgan; Editing by Kevin Drawbaugh and Grant McCool)