Image caption The Fed chairman also lent support to critics of China's exchange rate policies

US Federal Reserve Chairman Ben Bernanke has told Congress that the US economy is "close to faltering" and more action may be needed.

Giving testimony to the US legislature, he said the Fed was "prepared to take further action as appropriate" to bolster the recovery.

His comments come after the Fed already decided to shift $400bn of investments into longer-term government debt.

Stock markets responded positively, with the Dow Jones rallying over 1%.

But US markets fell back again somewhat in afternoon trading, until a strong late rally just before the close, which left the Dow Jones Industrial Average uip 1.4% for the day.

China 'blocking'

He said the switch into longer-term government debt announced last month - dubbed Operation Twist - was the equivalent of a half-percentage-point cut in interest rates, and gave a "meaningful, but not an enormous support to the economy".

But he warned that the eurozone debt crisis, as well as overly hasty spending cuts by the federal government, risked undermining the US recovery.

When asked what additional action the Fed might take if the economy continued to weaken, he reiterated policy options he has laid out in past speeches:

giving clearer guidance as to how long interest rates will be held close to zero, and in what circumstances they would rise;

increasing "quantitative easing" - the Fed's purchase of US government bonds and other debts;

cutting the interest rate paid on excess cash that the banks hold at the Fed.

But he added that the US central bank's monetary policies were "no panacea".

The Fed chairman also appeared to lend support to those seeking to take action against China's policy of buying up US debts - which has the effect of holding down the value of the yuan at a more competitive exchange rate.

"Chinese policy is blocking what might be a more normal recovery process in the global economy," said Mr Bernanke, who said China was shifting demand away from the struggling US and European economies.

The US Senate has just begun a week-long debate on a bill that would threaten China, and other countries accused of keeping their currencies unfairly cheap, with trade sanctions.

On the subject of the eurozone debt crisis, Mr Bernanke said there was little help the US could offer.

"The problems are not really economic, they're political," he said. "Because what they are trying to do is find solutions that are acceptable to 17 different countries, which you can imagine is very difficult."

He said that the US was an "innocent bystander" to the crisis, and while the country's direct exposure to any debt default by Greece was limited, the real risk was that a disorderly default could trigger a run on other eurozone governments and a banking crisis, which would hit the US badly.