But he warned that such a recovery wouldn't last unless other steps were taken to stabilise the shaky financial system.

Although Bernanke has previously endorsed the notion of a fresh round of government stimuli to lift the country out of a recession, it marked the first time the Fed chief referenced the roughly US$800 billion recovery plan now being worked on by Obama, who takes office next week.

Obama envisions a blend of tax cuts and increased government spending, including on big public works projects, to make up the stimulus plan.

Bernanke, who didn't weigh in on the details of the evolving package, made clear that such a recovery plan was needed as part of a broader, multi-pronged government response to combat the worst financial crisis to hit the US and the global economy since the 1930s.

"The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity," Bernanke said in a speech to the London School of Economics.

"In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilise and strengthen the financial system," he warned. "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively."

Credit clog

To help on that front, the Fed is loaning out billions to financial companies and buying mounds of companies' debt to help bust through the debilitating credit clog.

And the US Treasury Department is overseeing a US$700 financial bailout program that has pledged to inject US$250 billion into banks in return for partial government ownership.

Some money from the bailout pot also is being used to guarantee against possible losses from risky assets held by Citigroup Inc.

Bernanke said "more capital injections and guarantees may become necessary" to stabilise financial markets and spur more lending.

If Obama's incoming Treasury secretary Timothy Geithner decided to remove toxic assets from financial institutions' balance sheets - the original, but abandoned strategy under the US$700 billion bailout - Bernanke suggested some options to do that.

Public purchases of the troubled assets are one way to go, he said.

Another option is to provide asset guarantees under which the government would agree to absorb - presumably in exchange for warrants or some other form of compensation - part of the prospective losses on specified portfolios of rotten assets held by banks. Yet another approach would be to set up and capitalise so-called 'bad banks' which would buy assets from the financial institutions in exchange for cash and equity in the bad bank.

Some Americans and lawmakers on Capitol Hill have been upset about Treasury's management of the bailout programme, which has provided aid to financial companies and others on Wall Street - some of whom are blamed for getting the country into economic the mess in the first place - while other struggling industries got little or no assistance.

Bernanke said he understands this concern, but added: "This disparate treatment, unappealing as it is, appears unavoidable."

The United States' economic system is critically dependent on the free flow of credit, Bernanke said. It is like the economy's oxygen. As it has been cut off, the economy has sunk deeper into recession, taking American jobs with it.

Washington policymakers, Bernanke said, "must therefore do what they can to communicate to their constituencies why financial stabilisation is essential for economic recovery and is therefore in the broader public interest."

Obama's political skills will be put to a high-stakes test with Congress as he seeks access to the second half of the US$700 billion bailout pot.

Congress has a 15-day deadline to reject the request, which President George W. Bush made on Obama's behalf on Monday.

The US central bank will meet later this month to assess economic and financial conditions.

Crisis prevention

Even as the US battles the current crisis, it must move to prevent future ones. To be effective, international cooperation is needed, Bernanke said.

"A clear lesson of the recent period is that the world is too interconnected for nations to go it alone in their economic, financial and regulatory policies," Bernanke said.

"International cooperation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery."

In time, the global economy will recover from the current crisis, "but the timing and strength of the recovery are highly uncertain," he added.

- AP