WASHINGTON, July 18 (Reuters) - On the surface, it looks like the Dodd-Frank financial oversight law is in trouble.

U.S. regulators are months behind schedule in rulemaking, Republicans have succeeded in holding agency funding hostage, and odds are good that the business community will win its first court challenge to an important provision.

On top of that, Republicans and Wall Street titans are selling a doomsday scenario of Dodd-Frank killing the struggling economic recovery. Behind the scenes, though, a sort of acceptance is setting in.

"There are people who are... using budget conversations and other delay-type of activities to water down or substantively change Dodd-Frank. But I'd say the majority of people are saying, 'It is what it is,'" said Todd Groome, the chairman of the Alternative Investment Management Association, a global hedge fund industry group.

"Let's try to make it work," Groome said.

Democrats, led by Senator Christopher Dodd and Representative Barney Frank, triumphed a year ago in forcing through broad market reforms in response to the worst financial crisis in generations and a severe recession.

The legislation reins in banks' risky trading, cuts into Wall Street bonuses, calls for stricter oversight of hedge funds, and sheds light on the roughly $600 trillion global derivatives market that played a role in bringing the global financial system to its knees.

There have been persistent cries for repeal of the Dodd-Frank law or significant revisions.

But with Democrats in control of the upper chamber of Congress and President Barack Obama able to defend Dodd-Frank with his veto pen, efforts by Republicans to substantially scale back the law seem unlikely to succeed.

"It requires bicameral action and agreement between the Congress and the President to change the law. It is therefore unlikely, even with passions running high, that a dramatic overhaul could be whisked through the system," said Chris Cox, the Republican chairman of the Securities and Exchange Commission during the height of the financial crisis. He is now a partner at law firm Bingham McCutchen.

That is not to say the new regulations are entirely safe. Industry watchers and lawmakers have pointed to three avenues that could be used to alter the bill's shape and scope: legislative and budgetary changes, legal challenges, and direct lobbying to the regulators.

SHOW ME THE MONEY

Most proponents of Dodd-Frank say the biggest threat to carrying out the legislation is starving it of funding.

Despite a pledge in the law to bolster funding for regulators, efforts by Republicans to slash government-wide spending are poised to leave the SEC and Commodity Futures Trading Commission without the resources needed to police the very rules they are now scrambling to write.

"On the funding issue, this is a problem of major proportions," said Barbara Roper, director of investor protection for the Consumer Federation of America. "It's a problem for the SEC. It's a crisis for the CFTC."

Frank, the ranking Democrat on the House Financial Services Committee, said his No. 1 concern is getting funding to implement the law. "If they don't fund the SEC and CFTC, they will get slowed down," Frank said.

SEC Chairman Mary Schapiro said her agency is in "very good shape" for writing dozens of new rules. But without more people, including examiners to conduct exams of hedge fund managers, those rules will be tough to enforce.

"We're going to have to make some very hard choices about how we utilize the resources that are available to us," Schapiro said in an interview with Reuters.

THROW DOWN THE GAVEL

Regulators are already bracing for legal challenges to particularly controversial provisions in the Dodd-Frank law, such as the CFTC's speculative position limit rules, the SEC's conflict minerals disclosure provision, and the constitutionally of the Financial Stability Oversight Council.

"We'll be challenged," Bart Chilton, a Democratic CFTC commissioner told Reuters. "We think about litigation risk all the time, as we're preparing the rules we think about it."

Already the U.S. Chamber of Commerce and the Business Roundtable are testing the waters with a legal challenge to the SEC's new rule that would make it easier for shareholders to nominate directors to corporate boards. They are accusing the SEC of failing to follow federal rulemaking procedures by inadequately weighing the rule's economic benefits and costs.

Flaws in cost-benefit analyses have seen SEC rules voided in the past, and challenges on this basis could become a tool for the industry to slow rules that hit their profits.

"The court route is going to work in individual cases," said Donald Langevoort, a professor at Georgetown University Law Center who specializes in securities regulation.

He said he expects the SEC's proxy access rule to be struck down in court soon. But he said legal challenges won't amount to an all-out assault on Dodd-Frank.

"I suspect that it is a card that individual members of industry can't play too often," Langevoort said. "I think they have to pick their spots."

Schapiro said she does not know if more SEC rules will be challenged. She said the agency is focused on carrying out what Congress asked them to do. "I can only live in the here and now," Schapiro said.

SLOWING THE TRAIN

With little shot of getting major changes through the legislative process, the industry has been working closely with regulators to steer the direction of the rule-writing process. Already there has been some signs of success.

The SEC and CFTC, for instance, have granted industry requests to delay the implementation of numerous derivatives rules that were slated to go into effect July 16.

They have also extended comment periods and taken actions to improve their process for weighing the costs and benefits of the rules to the economy.

U.S. House and Senate Republicans have taken some credit for pressuring regulators to slow down and embrace a more measured approach to the rule-writing.

"We've already achieved several changes by the regulators by pointing out deficiencies with the bill," said House Financial Services Chairman Spencer Bachus. "The regulatory process has been more effective."

But Democrats and investor advocacy groups have expressed concern that regulators are succumbing to pressure by powerful Wall Street banks to water down the rules.

"They're under a lot of pressure from people who are finally supposed to be re-regulated," said Democratic Senator Carl Levin. "Some of the delays sort of instinctively make you worry... 'Are they really going to be able to stick with the intent of what we did?'"

(Reporting by Sarah N. Lynch and Christopher Doering)