Bernanke's comments, coupled with news of a hefty loss at Merrill Lynch and a plunge in regional factory activity further clouded an increasingly dire view of the economy, with US stocks closing sharply lower on Thursday, with the benchmark S&P 500 plummeting to a 15-month low.
 

In one of the strongest signals yet that the economy is at high risk of contracting, the Philadelphia Federal Reserve Bank said mid-Atlantic factory activity has slowed much more than expected to levels that typically signal recession.

 

That extinguished Wall Street's early attempt at a rally, with shares of companies most sensitive to the economy's ups and downs suffering the most.

 

The Dow Jones industrial average fell 306.95 points, or 2.46 per cent, to close at 12,159.21, down more than 1,000 points since the beginning of 2008.

 

The Standard & Poor's 500 Index was down 39.95 points, or 2.91 per cent, at 1,333.25.

 

The Nasdaq Composite Index was down 47.69 points, or 1.99 per cent, at 2,346.90.

 
Stimulus package
 
Bernanke said he favoured a "temporary" package which must be swiftly implemented.
 
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.
 
The US economy has been rocked by the sub-prime mortgage crisis, where people with poor credit were offered mortgages only to default on the repayments, leading to a wave of repossessions and bank losses.
 
Bernanke, speaking to the US house budget committee, did not provide further specifics of the stimulus plan, other than indicating it could include tax rebates and interest rate cuts and warning that its design and implementation would be "critically important".
 
The White House also said on Thursday that it believed an economic "boost" was necessary.
 
It said George Bush, the US president, would hold meetings with senior officials from the Democrat-controlled US congress to discuss "the economic landscape".
 
Merrill Lynch loss
 
US banking giant Merrill Lynch posted a $10bn loss for the fourth financial quarter, citing the sub-prime mortgage crisis.
 
The loss is reportedly the biggest in the bank's history.
 
The results followed the bank's $2.3bn loss in the third financial quarter.
 
Other banks, including Citigroup, UBS and Morgan Stanley, have also posted huge losses following the sub-prime crisis.
 
In other economic news, US home-building projects that were started in December fell by 14.2 per cent - their lowest level in more than 16 years - and permits for future building hit a 14-year low, a US government report said.
 
Weak economic data has intensified fears of a US recession and increased pressure on the US government for an economic stimulus plan.