"It does nothing basically for the stressed mortgage payer," Shelby said on CBS's "Early Show." "It does a lot for three or four or five banks, including foreign banks."
Shelby, the ranking Republican on the Senate Banking Committee, said he had a list of more than 200 top economists who "say this structure ... is a bad plan."
"I think if we adopt the Paulson plan or something close to it, we're making a big mistake," he said.
On the same program, U.S. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said negotiators addressed many of Shelby's concerns.
Frank, a key negotiator, called an alternative plan offered by conservative House Republicans an "ambush plan."
The conservative bloc opposes taxpayers underwriting the bailout and offered a plan in which Wall Street firms would contribute to an insurance plan for investment houses, tax breaks and more deregulation, among other things. The move came after congressional leaders announced agreement on principles of the Paulson plan.
"On Wednesday, Secretary Paulson and (Federal Reserve) Chairman (Ben) Bernanke testified before the House Financial Services Committee," Frank said. "None of the Republicans now backing this new plan even mentioned it to him."