"The economic situation has become distinctly less favorable" since the summer, the Fed chief told the House Financial Services Committee, a sign markets took to be evidence of yet more interest rate cuts by the U.S. central bank which pushed the euro higher.

Lower interest rates can jump-start a nation's economy, but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.

Shortly after his testimony, the euro surged to a record $1.5105 before falling back slightly to $1.5043 in afternoon trading, from the $1.4967 it bought in late trading Tuesday in New York.

The surging euro makes it more expensive for Americans visiting Europe, but makes U.S. shopping more appealing to Europeans.

Since Bernanke's last such assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said that the confluence of these factors has turned people and businesses alike toward a more cautious attitude toward spending and investment.

This, he said, has further weakened the economy.

That is in contrast to Europe where, despite the roaring euro, growth is still on track, albeit slightly slower, and markets are optimistic that should the U.S. go into recession, the continent would be able to weather any such slowdowns.

The European Central Bank, which has left its own rates unchanged since last summer, is expected to keep them at 4 percent when it meets next week.