Federal Reserve Chairman Ben Bernanke on Wednesday said global financial markets were under "extraordinary stress" and threatening an already weak U.S. economy as he offered his bleakest outlook since a credit crisis set in last year.
AP

WATCH: Bernanke's testimony
READ: Bernanke's statement

"The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth," Bernanke told the congressional Joint Economic Committee.

"The downside risks to the outlook thus remain a significant concern," he said. "Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

This was the Fed chief's second straight day of tough questioning on Capitol Hill about the Bush administration's proposed $700 billion bailout plan for Wall Street. Lawmakers have voiced skepticism about the plan, which is aimed at shoring up troubled financial institutions and markets.

Bernanke will be joined again later today by Treasury Secretary Henry Paulson to testify before a House committee. The session will be streamed live on CNBC.com

In this morning's testimony, Bernanke ticked off areas of the economy that are struggling or have been hit by financial turmoil, which in recent weeks felled investment bank Lehman Brothers and forced the government to take over mortgage finance firms Fannie Mae and Freddie Mac and rescue insurer American International Group.

"More recently, economic activity appears to have decelerated broadly," he said, speaking on the second day of testimony aimed at persuading skeptical lawmakers of the need for the government's $700 billion rescue plan.

Labor markets are weak and unemployment is high, he said.

Despite an easing of oil and gas prices since the summer, consumer spending is likely to be sluggish in the near term, he added. In addition, slower growth around the world is likely to blunt demand for U.S. exports, which had been helping buoy the economy.

While news on inflation has been more favorable, Bernanke said, the outlook remains highly uncertain.

WALL STREET IN CRISIS - A CNBC SPECIAL REPORT

Falling oil and commodity prices and the dollar's rebound from lows hit this summer have eased pressures, but it is difficult to predict the course of commodity prices, he said.

"The upside risks to inflation remain a significant concern as well," he added.

Here is a summary of his remarks:

"Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy."

ON RISKS TO GROWTH

"In particular, the intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth.

The downside risks to the outlook thus remain a significant concern."

ON OUTLOOK

"Real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly.

"All told, real gross domestic product is likely to expand at a pace appreciably below its potential rate in the second half of this year and then to gradually pick up as financial markets return to more-normal functioning."

ON FED TO ACT AS NEEDED

"I urge the Congress to act quickly to address the grave threats to financial stability that we currently face.

For its part, the Federal Open Market Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

"Recently ... the news on inflation has been more favorable. The prices of oil and other commodities, while remaining quite volatile, have fallen, on net, from their recent peaks, and the dollar is up from its mid-summer lows.

The declines in energy prices have also led to some easing of inflation expectations.

"If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year. Nevertheless, the inflation outlook remains highly uncertain."