UPDATE 1-US Congress to act on air safety, larger bill fades

* Safety provisions to be approved separately

* FAA bill stalled over fees, labor, service issues

* House to leave for August on Friday, Senate next week

(recasts, adds details of new bill, comment)

By John Crawley

WASHINGTON, July 28 (Reuters) - Congress readied legislation on Wednesday to boost airline safety while prospects faded for passage of a separate bill this year to advance air traffic modernization and set other U.S. aviation priorities.

Provisions for increasing co-pilot training hours, especially for flying in wintry conditions, stem from the 2009 crash of a commuter plane in Buffalo that killed all 49 passengers and crew aboard. Investigators largely blamed crew error in the crash of Continental Connection CAL.N flight 3407 operated by Colgan Air, a unit of Pinnacle Airlines Inc PNCL.O.

Lawmakers were under pressure from relatives of the victims to act on the safety issues. Other steps moving forward aim to more closely monitor pilot records, reduce pilot fatigue and increase inspections of regional airlines.

Airlines were not expected to object to the safety provisions, which were a centerpiece of the larger aviation bill and would now be stripped out and attached to an immediate must-pass proposal to fund air traffic operations through September.

Some airline industry and congressional officials said the longer-term legislation could be dead for the year, with the House and Senate unable to resolve all differences in separate versions passed by both chambers earlier this year.

The safety provisions were viewed by many insiders as leverage for getting the more comprehensive bill through Congress.

Others held out hope for a breakthrough in negotiations, stalled for weeks in the Senate on thorny issues.

"This bill should be able to stand on its own," said Representative James Oberstar, chairman of the House Transportation Committee.

But Senate procedures and delays in preparing a final deal for a vote with time dwindling on the legislative calendar were the primary obstacle to passage, congressional and industry officials said.

"It's very close to a point where we won't have the time to continue working on this and once again this bill will fail," said Byron Dorgan, the chairman of the Senate's aviation subcommittee.

House lawmakers leave town on Friday for a month, with the Senate to follow next week. The agenda will be dictated by the November congressional elections and when they return in September there will little time before the end of the year for action.

The aviation bill, delayed for three years, would authorize funding over the next two years for the Federal Aviation Administration (FAA), which oversees air traffic operations for 9 million commercial flights annually. More than 618 million passengers flew domestically in 2009.

The FAA budget is about $14 billion annually.

It would also extend funds for the next step in the $20 billion effort to modernize the air traffic system, moving from a radar-based network to one relying on satellites.

One sticking point involved the prospect of new long-haul service that could benefit carriers like US Airways Group (LCC.N), Delta Air Lines (DAL.N) and American Airlines, a unit of AMR Corp AMR.N, operating at Washington's Reagan National airport where landing rights are government controlled.

The Senate was also stuck on a proposal for a roughly $1 increase in airline passenger fees earmarked for airport capital projects, a provision opposed by airlines and certain Republicans as a tax increase.

Another contentious provision, one that would make it easier for ground workers to unionize at FedEx Corp (FDX.N), was not expected to survive. But lawmakers have not settled how the proposal would be removed from the bill.

Jim DeMint, the top Republican on the Senate aviation committee and an opponent of a fee increase, said the "process has become so toxic" and it was time to "start the negotiations over." (Reporting by John Crawley; Editing by Steve Orlofsky)