UPDATE 1-Fed's Stern wary of support for ailing banks

(Adds comments, details, background)

By Jamie McGeever

LONDON, March 27 (Reuters) - The U.S. government should be careful about aiding the creditors of troubled banks despite a persistent credit crisis that will likely be a drag on economic growth for some time, a top Federal Reserve official said.

The United States is entangled in its worst financial crisis in several decades, the product of a highly leveraged market for mortgage-backed bonds that have plummeted in value and lead to widespread mistrust among banks.

The debacle culminated in the collapse of the country's fifth-largest investment bank, Bear Stearns (BSC.N: Quote, Profile, Research), which required an emergency buyout by rival JPMorgan Chase & Co. (JPM.N: Quote, Profile, Research) that was funded by the Fed.

By creating the perception of a safety net, financial bailouts could lead to irresponsible risk-taking in the future, Minneapolis Fed President Gary Stern said in prepared remarks on Thursday.

"While governments cannot and should not uniformly avoid public support for creditors of failing banks, they should seek to minimize that support because of the distortions it produces," he told an audience at London's European Economics and Financial Centre.

His comments echoed the approach of Republican presidential nominee John McCain, who argued this week that the federal government had no business helping reckless investors and housing speculators.

Democratic presidential hopefuls Hillary Clinton and Barack Obama have urged a more proactive approach, saying an unfettered decline in housing prices risks sending the economy into a deep recession.