UPDATE 4-Federal Reserve says US economy is leveling out

* Fed says economic downturn is leveling out

* Fed extends duration, not size of Treasuries buying

* Anticipates full amount of Treasuries bought by end-Oct

(Recasts, adds details)

By Mark Felsenthal and Alister Bull

WASHINGTON, Aug 12 (Reuters) - The Federal Reserve said on Wednesday the U.S. economy was showing signs of leveling out two years after the onset of the deepest financial crisis in decades and it moved to phase out one emergency measure.

The U.S. central bank also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period to guide the way to recovery.

The Fed made its clearest statement to date that it sees the recession nearing an end and that shattered financial markets are healing.

"Information since the Federal Open Market Committee met in June suggests economic activity is leveling out," the Fed said, referring to its policy-setting panel. "Conditions in financial markets have improved in recent weeks."

It is the first time since August 2008 that the committee's statement has not characterized the economy as contracting, weakening, or slowing.

Many peg the onset of the crisis to French bank BNP Paribas' move in August 2007 to freeze funds because of problems with U.S. subprime mortgages. In the months that followed, the U.S. economy toppled into the most damaging financial crisis and painful recession in decades, and the economic malaise spread around the world.

"They see the worst with the economy is behind us but they don't want to jump the gun and pull back quickly," said Craig Thomas, a senior economist at PNC Financial Services in Pittsburgh.

The Fed cautioned that the economy remains fragile as employers continue to cut jobs and businesses trim investment.

U.S. Treasury prices fell after the Fed statement in apparent disappointment that the Fed did not increase the amount of debt that it plans to buy but subsequently regained some ground.

However, major U.S. stock indexes flirted with 10-month highs and the U.S. dollar rose against the yen.

The Fed cut interest rates to a range of between zero and 0.25 percent in December and pumped hundreds of billions of dollars into financial markets to stimulate economic activity in aggressive efforts to thwart the recession.