WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economic recovery was on a solid footing but cautioned it could be years before the jobs lost during the deep recession of 2008-2009 are restored.

Chicago Federal Reserve Bank President Charles Evans attend a dinner function at a hotel in Hong Kong March 30, 2010. REUTERS/Tyrone Siu

While Bernanke said the economy had made an “important transition” to relying less on government support, his emphasis on the struggles of the U.S. jobs market suggested the central bank was in no rush to raise interest rates.

“A significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009,” he told the House of Representatives Budget Committee. “In this environment, inflation is likely to remain subdued.”

U.S. stocks rose for most of the session, partly on Bernanke’s optimism, but gains slipped late in the session and stocks were lower heading into the close.

Bernanke said the economic recovery’s reliance on government spending would probably diminish over time, while increasing private demand would take over the job of stimulating growth, as recent data showed.

That view was bolstered by a report from the Fed that said the economy strengthened last month, even as worries about Europe’s debt crisis dented confidence.

“Economic activity continued to improve since the last report across all twelve Federal Reserve districts, although many districts described the pace of growth as ‘modest’,” the Fed said in its Beige Book, an anecdotal report on economic conditions.

SLOW JOBS RECOVERY

Policymakers at the U.S. central bank will lean on the Beige Book at their next meeting on June 22-23 as they weigh how quickly they should move to withdraw economic support.

The Fed slashed short term interest rates to near zero and pumped more than $1 trillion into the financial system to pull the economy out of its worst recession since the 1930s. It has vowed to hold borrowing costs exceptionally low for an extended period and most analysts do not expect rate rises until 2011.

“Concern No. 1 -- and it far outstrips everything else -- is the labor market” Abby Joseph Cohen, president of Goldman Sachs’ Global Market Institute, said at the Reuters Investment Outlook Summit in New York.

Bernanke told lawmakers weak housing and commercial property markets, and budget cutting by states, were among the “significant restraints” holding back the U.S. recovery, and he said the unemployment rate would only decline slowly.

In response to a question, he said gold prices, which hit an all-time high on Tuesday, could reflect anxiety about financial market instability rather than inflation worries. Gold futures extended losses after Bernanke’s comment.

Employers added 431,000 jobs in May but the lion’s share of the hiring was for temporary government jobs to conduct the decennial census. Only 41,000 private-sector jobs were created, raising concerns about the recovery’s health.

Bernanke, however, appeared to play down the discouraging data, noting that private payrolls have risen by an average of 140,000 per month over the past three months. The Fed expects monthly gains of 150,000 to 250,000, he said.

EYES ON EUROPE

Bernanke said the Fed is keeping a close watch on the European debt crisis for any spillover to the U.S. economy. Actions taken by European leaders show a firm commitment to calming strains and restoring stability, he said.

“If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” he said.

Another drag on the U.S. recovery is the housing market, which has faltered with the expiry of federal tax credits for buyers, Bernanke said. Weekly mortgage loan data released on Wednesday showed mortgage applications slumping in the most recent week to a fresh 13-year low.

Bernanke renewed his warning that as the U.S. population ages, government pension and health care obligations to retirees put the U.S. budget on an unsustainable path.

“We should be planning now on how we meet these looming budgetary challenges,” he said. However, he said now was not the time to tighten the U.S. budget, because the economy was still in need of support.

The budget deficit hit $1.4 trillion last year and is projected at $1.6 trillion this year. A Treasury Department report to Congress last week said the ratio of debt to gross domestic product could rise to 102 percent by 2015 from 93 percent this year.

President Barack Obama is demanding 5 percent budget cuts across many agencies as he seeks to show fiscal discipline while keeping the economic recovery on track.