Federal Reserve Chairman Ben Bernanke, seeking to soothe markets worried about the eagerly awaited government stress tests of 19 big banks, on Tuesday downplayed the possibility of new taxpayer bailouts.

The central bank chief told a congressional panel that many of the banks testing out as deficient on capital will be able to bolster their balance sheets through private-sector funding, but he left open the option of more government support.

As he spoke, regulators and the 19 banks themselves were in final talks over the test results, to be revealed publicly on Thursday, after weeks of keen anticipation among investors.

Analysts expect the test results will say that all 19 banks are solvent, but that 10 or 11 of them need more capital to weather a potential worsening of the U.S. recession.

Bernanke said most of the capital-needy banks will be able to raise additional capital through either issuance of new capital or through conversions and exchanges or the sales of assets and other measures that would raise capital.

Banks expected by analysts to land on the government's needy list, include Citigroup , Bank of America and Wells Fargo . Citi has been told it will need to boost its common equity by about $10 billion, a person familiar with the matter said on Monday.

FBR Capital Markets Managing Director Paul Miller estimated on Tuesday that 11 of the 12 banks he analyzed will need new capital, with JPMorgan Chase & Co the sole exception.

CreditSights Inc, a credit research group, said additional banks possibly testing out as adequately capitalized could include Goldman Sachs , Morgan Stanley and Bank of New York Mellon .

Detailed results will likely be released by the banks to shareholders on Friday, JPMorgan Chase & Co Chief Executive Jamie Dimon said at a news conference.

Some banks could announce as part of their results more concrete plans to repay government funds. U.S. officials could lay out as soon as Wednesday guidelines for how banks can pay back bailout money, sources familiar with administration thinking said on Tuesday.

One key condition is expected to be that banks are able to participate in the credit markets without the help of government facilities, such as the Federal Deposit Insurance Corp's debt guarantee program, the sources said, speaking anonymously because the guidelines have not been made public.

The chance of a market shock lingered on Tuesday, with some analysts noting stubborn questions remain about the tests. But Bernanke adhered to the Obama administration's latest talking point -- the tests won't offer big surprises.

I've looked at many of the banks and I believe that many of them will be able to meet their capital needs without further government capital, Bernanke told the congressional Joint Economic Committee.

GOLDMAN UPGRADES

Shortly after Bernanke's remarks, Goldman Sachs Credit Research upgraded the U.S. banking sector to attractive from neutral.

Corporate bond spreads tightened on optimism about the test results and the economy. Demand was strong for the Bank of New York Mellon's first unguaranteed debt offering since last August, joining other recent successful bank debt offers.

Bank stocks, having rallied in recent weeks, ended mixed on Tuesday in a largely flat broader market. The KBW Banks stock index <.BKX> of 24 large banks closed down 1.6 percent at 36.26, up sharply from a March 6 closing year-low of 18.62.

Recovering bank stocks could point to new opportunities for financial institutions to raise capital in the private sector, and to a government exit from the banking business.

I do think there will be significant opportunities for capital raising outside of government sources, Bernanke said. Obviously it's not our intention or desire to have long-term government ownership of banks.

The Treasury Department engineered a massive taxpayer bailout of the largest banks, tapping a $700 billion financial rescue fund created last year.

The Federal Reserve has also intervened dramatically to shore up the banks after their balance sheets were hammered by the collapse of a historic real estate bubble that undermined exotic debt instruments and credit derivatives.

I think we're in far better shape today than we were in September and October, Bernanke said. I do believe that availability of that capital helped us dodge what would have been a truly cataclysmic collapse of the global banking system ... I think we've made a lot of progress.

150 PAGES

Regulators plan to release the test results late Thursday in a 150-page document. The banks will be given time to issue plans to raise capital, but markets can be expected to push for quick evidence of a realistic recovery strategy.

Michael Poulos, head of the financial services practice at consulting firm Oliver Wyman, said investors have mostly priced in what they expect from the stress test results and are more optimistic in terms of the ability of banks to recapitalize.

If you look at the biggest banks, their prices have tripled from the bottom, and I'm not expecting them to move much on Thursday, he said, adding that banks will have one month to come up with their capital recovery plans.

Some banks have been told they may publicly talk about test results late on Thursday, lifting a gag order in place since they were briefed on preliminary results on April 24.

The banks will have to devise solutions to hit target capital ratios, with a government capital infusion program as a backstop, not a first option. Firms that cannot raise enough private capital will likely seek further federal aid by converting the government's preferred stakes to common equity.

For an institution like Citigroup, for example, that could result in the government owning more than a 50 percent stake. But the administration has made clear it is aiming to exit the banking sector rather than extend its ownership.

The ultimate purpose of the tests was obviously always to increase certainty and to give the markets a sense of where the bottom would likely be, not only in terms of credit losses, but also government intervention, Poulos said.

(Reporting by Karey Wutkowski and Kevin Drawbaugh; Additional reporting by Dan Wilchins, Jennifer Ablan and Jonathan Stempel in New York, with Anna Driver in Dallas; Editing by Andre Grenon)

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