* Obama praises Bernanke for courage and creativity
* Obama consulted Geithner, Emanuel on decision
* Bernanke must be confirmed by U.S. Senate (Adds Republican, market reaction, Goolsbee)
OAK BLUFFS, Mass., Aug 25 (Reuters) - U.S. President Barack Obama nominated Ben Bernanke to a second term as Federal Reserve chairman on Tuesday, aiming for continuity at a time when the U.S. economy is breaking free from a deep recession.
The decision, while widely expected, was welcomed by financial markets and policy makers around the globe. Economists said it removed uncertainty at a delicate juncture in the economy's recovery.
Obama interrupted his vacation on the Massachusetts island of Martha's Vineyard to make the brief announcement with Bernanke, 55, at his side.
"Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall," Obama said.
Bernanke's four-year term expires in January and the president had not been expected to make an announcement until later this year.
Critics said the announcement had been timed to deflect attention from less market-friendly news on the government's budget deficit, but an Obama aide denied this.
"There has been a considerable amount of speculation in the marketplace, both in the market and among observers of the Fed, and going into the fall the president wanted to end that speculation," Austan Goolsbee, a member of the White House Council of Economic Advisers, told Reuters Television.
The White House raised its 10-year cumulative budget deficit projection by $2 trillion on Tuesday to approximately $9 trillion. That would push the national debt up from more than $11 trillion now to more than $20 trillion in 2019.
With polls showing Americans deeply worried about the deficit, the new data will make it more difficult for Obama to push through his ambitious economic and healthcare overhaul.
U.S. stocks were slightly higher in afternoon trading, buoyed by news of Bernanke's nomination and strong housing and consumer confidence data. [ID:nN25205751]
OBAMA MADE DECISION LAST MONTH
Before the president began a week-long vacation on Sunday, Obama administration officials repeatedly stressed that he would not be making news.
Analysts said the timing of the announcement was shrewd.
"We entered the financial crisis two years ago with an untested Fed chairman. Bernanke has been through the crucible since then," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.
"Moving into the clean-up phase with another new and untested chairman would have just compounded the uncertainty in the outlook."
With growing signs the U.S. economy is slowly recovering, thanks in large part to Bernanke's efforts, the Fed chairman should have little difficulty winning confirmation from the Senate again.
Obama decided to nominate Bernanke a month ago, after consulting Treasury Secretary Timothy Geithner and White House chief of staff Rahm Emanuel, an administration official said.
Lawrence Summers, Obama's top White House economic adviser and a former U.S. Treasury secretary who had been mentioned as a possible candidate for the top job at the Fed, also recommended Bernanke's nomination, the official said.
Bernanke was told in the Oval Office last Wednesday.
Obama is counting on Bernanke to nurse the economy back to health at a time when unemployment, home foreclosures and bank failures are still mounting.
The Fed chairman has pushed U.S. interest rates to near zero and flooded financial markets with hundreds of billions of dollars to stem a credit crisis and turn back recession.
Bernanke, appointed by President George W. Bush and widely respected as a top scholar on the Great Depression, now faces the challenge of pulling back the Fed's extraordinary support for the economy without setting back hopes for a recovery.
"PROBABLY THE RIGHT CHOICE"
Joining Obama in a school hall in the town of Oak Bluffs, Bernanke shook hands with the president before praising his support for a strong and independent Federal Reserve.
"We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable economic and financial environment in which opportunity can again flourish, and in which Americans' hard work and creativity can receive their proper rewards," Bernanke said.
After the announcement, Obama headed to a golf course for a second straight day on the links.
Obama's Democrats control the Senate, but Bernanke, a Republican, has faced criticism from lawmakers in both parties who say he has gone too far in extending Fed support that will be difficult to unwind, threatening future inflation.
Senate Banking Committee Chairman Christopher Dodd vowed a "thorough and comprehensive" hearing to consider Bernanke's nomination. But he appeared to endorse a second term for the Fed chairman, saying he was "probably the right choice."
Senate Majority Leader Harry Reid said Bernanke's renomination sent the right signal to financial markets and he expected the Senate to reconfirm him.
Mitch McConnell, the Republican leader in the Senate, said the confirmation hearings would be an opportunity to question Bernanke about the cumulative impact of the administration's trillions of dollars in new spending and borrowing.
** For more stories on the Fed chief and his renomination, doubleclick on [ID:nBERNANKE]; for stories on the Fed and the challenges it faces, see [US-FED-CEN-RTRS] (Additional reporting by Tim Ahmann and Lucia Mutikani in Washington; Editing by Simon Denyer and Phil Stewart)