"This is a political effort because of what happened in Massachusetts," said economist Peter Morici of the University of Maryland.
Banks have also been lobbying against more stringent regulation.
"If these folks want a fight, it's a fight I'm ready to have," Mr Obama vowed.
The president dubbed his proposals on limiting bank risk the Volcker rule - after Paul Volcker, one of his economic advisors and a former chairman of the Federal Reserve central bank.
The moves follow popular anger at financial institutions, who have been paying large bonuses to staff even as they accepted government bail-outs to keep them going.
Mr Obama's proposals appear to be a return to the principles underlying the Glass-Steagall Act.
That law - from the 1930s in the aftermath of the Great Depression - separated commercial and investment banking and was eventually abolished in 1999 under President Bill Clinton.
Mr Clinton's financial secretary at the time, Robert Rubin, previously worked at Goldman Sachs and went on to be an adviser to Citigroup until last year.
The latest proposals follow a $117bn (£72bn) levy on banks to recoup money US taxpayers spent bailing out the banks.
The tax will claw back some of the losses from a $700bn taxpayer bail-out of US banks known as the Troubled Asset Relief Program (Tarp).
It was drawn up in the midst of the financial crisis in 2008, following the collapse of US investment bank Lehman Brothers and rescue of insurance giant American International Group (AIG).
The industry lobby group for banks suggested Mr Obama was trying to return the US to the past.
"The better answer is to modernise the regulatory framework and not take the industry and the economy back to the 1930s," said the Financial Services Roundtable, an industry group that represents large Wall Street institutions.
In the UK, City Minister Lord Myners said the US proposals were "very much in accordance with the direction we have been setting".
While shadow chancellor George Osborne said that if the Conservatives won the next general election, they would impose an identical dismantling of UK banks to those suggested by the US president.
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