Federal Reserve chairman Ben Bernanke tonight admitted for the first time that a full-blown recession in the US was possible.

While he did not go as far as saying such an outcome was a definite, his testimony to Congress was his most pessimistic so far.

Bernanke cited rising unemployment, falling numbers of new homes being built and a slump in consumer spending for the gloomy prognosis.

"It now appears likely that real GDP will not grow much, if at all, over the first half of 2008 and could even contract slightly," he said.

However, he added that the US economy should pick up thanks to the aggressive series of interest-rate cuts he and his Fed colleagues have imposed in recent months.

He was speaking just a fortnight after the Fed intervened to prop up the collapsed Bear Stearns bank.

Justifying that action, which critics have said put American tax dollars at risk, Bernanke said: "The sudden failure of Bear Stearns was likely to have caused market chaos that would have been very difficult to contain."

He added that other actions taken by the Fed, which have included massive injections of cash into the financial system, had helped stabilise the markets, although "considerable stress" remained.

Bernanke's comments were watched intently in the City and on Wall Street for an indication about the next direction for US interest rates.

Although noting his optimism about 2009 economic growth, many economists seized upon his later comments that he expected inflation pressures to moderate. Such an outcome would give him more room to cut interest rates towards 1% from their current 2.25% level.