WASHINGTON - Federal Reserve Chairman Ben Bernanke on Tuesday offered few new clues on whether the US central bank was moving closer to a fresh round of monetary stimulus, repeating the Fed's pledge to act if needed.

He told the Senate banking committee the US economic recovery was being held back by tighter financial conditions due to Europe's debt crisis and uncertainty surrounding US fiscal policy.

Financial markets had looked forward to Mr Bernanke's testimony for any signs the Fed was moving closer to a third round of bond purchases - QE3 in market parlance - to support the economy.

But the Fed chief disappointed investors, hewing closely to the message of watchful waiting that the central bank's policy panel delivered in June.

"Reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to economic growth, the committee made clear at its June meeting that it is prepared to take further action," Mr Bernanke said in his testimony on the Fed's semi-annual monetary policy report.

US stocks prices slipped and the dollar hit session highs against the euro. Prices of Treasury securities trimmed losses.

"The market was preparing for some signal of imminent policy action from the Fed and they certainly did not get that," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Clearly he left QE3 on the table, but there was no step closer to imminent action."

JOB SLOWDOWN

The Fed has held overnight borrowing costs near zero since December 2008 and has bought $2,3-trillion in government and mortgage-related debt in an effort to push long-term interest rates lower.

As the recovery faltered, it has promised to hold rates at rock-bottom levels until at least 2014 and has extended the average maturity of bonds in its portfolio in a further effort to depress long-term borrowing costs.

Despite the Fed's support, the economy is growing too slowly to lower unemployment. US gross domestic product expanded at a tepid 1,9% annual rate in the first quarter, and economists think its second-quarter performance was even weaker.

Mr Bernanke told lawmakers that recent deterioration in the labour market suggested the nation's 8,2% jobless rate would come down all too gradually, admitting for the first time the softness could not be explained away by purely seasonal factors.

During the second quarter, job creation averaged 75000 per month, down from an average of 226000 in the first quarter.

Mr Bernanke had previously said that unusually warm weather may have boosted hiring in the winter at spring's expense, while the big drop in economic output in the winter of 2008-09 may have thrown off the adjustments the government makes in the data for normal seasonal swings.

"Issues related to seasonal adjustment and the unusually warm weather this past winter can account for a part, but only a part, of this loss of momentum in job creation," he said.

TROUBLE AT HOME AND ABROAD

In response to a question, Mr Bernanke told the banking panel that manipulation of the benchmark London interbank offered rate (Libor) by banks and traders had undermined public confidence in financial markets.

He said the New York Federal Reserve Bank had responded promptly to concerns over Libor by informing the appropriate authorities.

Mr Bernanke repeated his warning to lawmakers about the importance of developing a credible long-term plan to reduce US government debt levels while avoiding sharp spending cuts and tax hikes in the near term. He highlighted concerns about a looming "fiscal cliff" that was likely to send the economy into recession unless Congress acted.

In addition to uncertainty related to fiscal policy, the economy is being restrained by tight borrowing conditions for some businesses and consumers, Mr Bernanke said.

He also said the Fed remained in close contact with European authorities, and was focused on making sure the US financial system remained resilient to financial shocks.

"Europe's financial markets and economy remain under significant stress, with spillover effects on financial and economic conditions in the rest of the world, including the US," he said.

Reuters