Bernanke offers bleak outlook

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Wednesday said global financial markets were under "extraordinary stress" and threatening an already weak U.S. economy as he offered his bleakest outlook since a credit crisis set in last year.

"The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth," Bernanke said in comments prepared for delivery to the congressional Joint Economic Committee.

"The downside risks to the outlook thus remain a significant concern," he said. "Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

Bernanke ticked off areas of the economy that are struggling or have been hit by financial turmoil, which in recent weeks felled investment bank Lehman Brothers and forced the government to take over mortgage finance firms Fannie Mae and Freddie Mac and rescue insurer American International Group Inc.

"More recently, economic activity appears to have decelerated broadly," he said, speaking on the second day of testimony aimed at persuading skeptical lawmakers of the need for the government's $700 billion rescue plan.

Labor markets are weak and unemployment is high, he said. Despite an easing of oil and gas prices since the summer, consumer spending is likely to be sluggish in the near term, he added.

In addition, slower growth around the world is likely to blunt demand for U.S. exports, which had been helping buoy the economy.

While news on inflation has been more favorable, Bernanke said, the outlook remains highly uncertain.

Falling oil and commodity prices and the dollar's rebound from lows hit this summer have eased pressures, but it is difficult to predict the course of commodity prices, he said.

"The upside risks to inflation remain a significant concern as well," he added.

(Reporting by Mark Felsenthal; Editing by Chizu Nomiyama)