Bernanke urges bold action to avoid lengthy slump

"We are better off moving aggressively today to solve our economic problems," he told the Senate.

"The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period," he said.

President Barack Obama's recent budget proposal projects an explosion of the budget deficit to $1.8 trillion, and a rise in the debt-to-GDP ratio to about 60 percent from 40 percent, the highest level since the early 1950s.

"All else equal, this is a development that all of us would have preferred to avoid," Bernanke said.

Whether the government needs to increase the size of a $700 billion bank rescue package depends on government evaluations of lenders and the course of the economy, the Fed chairman said.

Without a return to financial stability, the economy will not be able to recover, he said.

"Although progress has been made on the financial front since last fall, more needs to be done," he added.

(Reporting by Mark Felsenthal; Editing by Tom Hals)