UPDATE 1-Fed's Bullard: European woes show risks to recovery

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St. LOUIS Feb 5 (Reuters) - A senior U.S. Federal Reserve official said on Friday the economic recovery looks on track but the European debt crisis shows that it remains fragile.

Worries about the swollen budget deficits of Greece, Portugal and other members of the 16-nation euro bloc have raised the specter of sovereign debt defaults and gripped financial markets around the world in recent days.

"Some of the risks are that there would be renewed financial market turmoil, so what you've seen in the discussion of the problems of Greece, Portugal and other countries in Europe ... is the idea that you could get renewed national market turmoil," the president of the St. Louis Federal Reserve, James Bullard, said on a panel at Washington University.

"I do not think that's in our future," he added. "I do not see a return to the turmoil we saw in the fall of 2008, or in 2009, even though I think the sovereign debt problem is an issue."

Measures of financial market stress are looking better than they were a year ago, he said.

Financial markets have worried that smaller, debt-laden members of the euro zone, such as Greece, could be pushed out, though most analysts believe monetary union will survive.

Bullard, a voting member on the Fed's interest-rate setting panel, made a case for a steady U.S. economic recovery with an eventual improvement in the labor markets.

The U.S. economy has grown for two quarters in a row and the strong performance at the end of 2009 may even be revised higher, he said.

The economy grew at an annual pace of 5.7 percent in the fourth quarter, the fastest pace in six years, as businesses reduced inventories less aggressively than they had been earlier in the year.

While unemployment is high, the recovery of the jobs market typically lags the healing of the broader economy, Bullard said, as he stressed the high level of worker productivity in the United States.

"I think we will see job growth going forward because at some point firms will be caught short of employees," he said.

The Labor Department reported on Friday that the unemployment rate decreased to 9.7 percent, defying expectations that it would tick up to 10.1 percent. Payrolls, however, unexpectedly fell, shedding 5,000 jobs.

Bullard called the decline in the unemployment rate encouraging. "Usually when it starts ticking down it continues on a downward track," he said. (Reporting by Mark Felsenthal; Editing by Leslie Adler)