It would also extend federal tax deductions for state and local sales taxes.

Tax breaks for investment in coal gasification projects would also be expanded under the legislation, which comes as oil hit a record just below $127 a barrel this week and hovered above $124 a barrel on Thursday.

"This is a strong, timely and fiscally responsible tax relief package," Ways and Means Committee Chairman Charles Rangel, a New York Democrat, said in a statement, adding that it would reduce US dependence on foreign oil.

High prices at the gasoline pump with no relief in sight have become a major issue in this year's presidential and congressional election campaigns.

The legislation would also give an extra three years for a $1.01 per gallon tax credit for ethanol produced from grass and waste materials that was included in a $289 billion farm bill approved on Thursday by Congress. The Ways and Means legislation would provide for the tax credit through 2015, while the farm bill allows for the new tax credit through 2012.

President George W. Bush opposes the farm bill, but it passed Congress by enough votes to overturn a veto.

Record gasoline prices have encouraged the use of corn-based ethanol, which enjoys generous tax breaks. About one-third of this year's corn crop will go to ethanol producers, prompting livestock feeders and foodmakers to blame the ethanol boom for driving up their costs.

CLOSING HEDGE FUND TAX LOOPHOLE

To help pay for the cost of extending those and other tax breaks, the bill would close a tax loophole that allows hedge fund managers to defer taxes on their pay by sheltering it in offshore tax havens. The bill also would raise money by delaying for 10 years proposed rules affecting the way multinational corporations account for interest expenses.

The legislation now goes to the House which could take it up as early as next week.

The bill also provides $2 billion in bonds to help governments and power companies to finance clean renewable energy projects.

The bill also would renew through the end of this year a program allowing state and local governments to issue $400 million in bonds for updating public school facilities.

It also extends tax breaks aimed at helping rebuild areas devastated by Hurricane Katrina in 2005 and give New York City some tax credits for transportation spending in the area destroyed by the Sept. 11.