(REUTERS) -- Federal Reserve Chairman Ben Bernanke on Thursday defended the U.S. central bank's policies against charges from Republican lawmakers they risked sparking inflation, saying the economy still needs plenty of support.

Testifying before Congress, the Fed chief was repeatedly thrown on the defensive as he parried critiques from Republican lawmakers over the Fed's zero interest rate policy, its focus on employment and its policy prescriptions for housing.

Bernanke told the House Budget Committee that Europe's financial crisis still threatened the U.S. recovery, and said the Fed would do everything it can to ward off damage.

The basic reason for low long-term rates, which are also a feature of every other industrial economy, are low inflation, slow expected growth and the fact that the dollar is a safe haven, Bernanke said.

Paul Ryan, the committee's Republican chairman, took issue with the central bank's new 2 percent inflation target, saying a Fed policy statement last week suggested it would be willing to tolerate higher inflation nonetheless.

Bernanke pushed back against that idea: We are not seeking higher inflation, we do not want higher inflation and we're not tolerating higher inflation.

After slashing rates to near zero in late 2008, the Fed bought $2.3 trillion in bonds in a further effort to spur the economy. Many analysts expect it will further expand its portfolio in the months ahead with another round of purchases.

Last week, the Fed said U.S. overnight interest rates would likely remain near zero until at least through late 2014, a pledge widely seen as an effort to push other borrowing costs lower to spur stronger growth and job creation.

NOT SATISFIED

Bernanke said he was seeing signs that some of the factors dampening U.S. business investment, including uncertainty surrounding European bank woes, might be waning. But he added it was far too soon to say whether the United States would remain unscathed by troubles beyond its borders.

Risks remain that developments in Europe or elsewhere may unfold unfavorably and could worsen economic prospects here at home, Bernanke said. We will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy.

European leaders are haggling over how best to erect a firewall to prevent their debt crisis from spreading. At the same time, Greece is under pressure to clinch a deal with private creditors to make its debt load more manageable.

Many economists believe austerity moves throughout the euro zone have already tipped the region into recession.

Given that weak backdrop, many analysts believe the Fed will embark on a third round of bond purchases.

Bernanke kept the option of further easing on the table - and urged lawmakers to take steps of their own.

We are obviously not satisfied with where we are and while we will continue to do all we can to meet our dual mandate (of price stability and full employment) ... we hope that all of you and the administration will look for alternative ways to strengthen our economy, he said.

VULNERABLE TO SHOCKS

Bernanke faced pushback against a recent Fed white paper on housing, which some Republicans argued crossed the line into fiscal policy.

New Jersey Representative Scott Garrett lashed out at New York Federal Reserve Bank President William Dudley and Fed Governor Elizabeth Duke for what he described as actively proposing housing recommendations to Congress.

Bernanke said his colleagues were offering their individual views rather than the official position of the central bank, and he said the white paper was intended to lay out both pros and cons of potential policies.

The Fed chief reiterated his hedge on U.S. budget policy. He argued that long-term deficits raised the possibility of a crisis but warned against near-term fiscal tightening that might threaten the recovery.

Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery, Bernanke said. The sluggish expansion has left the economy vulnerable to shocks.

(Additional reporting by Mark Felsenthal; Editing by Tim Ahmann and Andrea Ricci)

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