U.S. President Barack Obama will nominate Ben Bernanke to a second term as chairman of the Federal Reserve on Tuesday, seeking to keep him in place to steer the world's largest economy out of its deepest downturn since the Great Depression.

Obama will interrupt his vacation on the Massachusetts island of Martha's Vineyard to make the announcement with Bernanke at his side at 9 a.m. EDT, a senior White House official said on Monday.

Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall, Obama will say.

U.S. stock index futures were slightly higher on Tuesday on the news. There was no significant impact on financial markets in Asia and Europe, however, where investors were more focused on whether a global economic recovery was really under way.

I don't think there will be any major impact, but it should be positive for markets such as the stock and bond markets in the sense that an element of uncertainty has been removed, said Takahide Nagasaki, chief FX strategist at Daiwa Securities SMBC in Tokyo.

The announcement could deflect attention from other less market-friendly news. The White House is set to raise its 10-year budget deficit projection by $2 trillion to approximately $9 trillion, and the non-partisan Congressional Budget Office will release new forecasts as well.

Bernanke, whose appointment to a new four-year term must be confirmed by the Senate, has pushed U.S. interest rates to near zero and flooded financial markets with hundreds of billions of dollars to stem a credit crisis and turn back recession.

HIGH MARKS FROM MARKETS

Obama is counting on Bernanke to nurse the economy back to health at a time when unemployment, home foreclosures and bank failures are still mounting.

Obama's Democrats control the Senate, but Bernanke has faced criticism from lawmakers of both parties who say he has gone too far in extending Fed support that will be difficult to unwind, threatening future inflation.

While I have had serious differences with the Federal Reserve over the past few years, I think reappointing Chairman Bernanke is probably the right choice, Senate Banking Committee Chairman Christopher Dodd said in a statement.

Dodd vowed a thorough and comprehensive hearing to consider the nomination.

Investors have given Bernanke, whose current term expires on January 31, 2010, high marks and had widely anticipated his reappointment, although an announcement was not expected until later this year.

Analysts suggested Obama was aiming for stability.

Agree or not, the types of applications and the size of (the Fed's) intervention are now established in the annals of Fed policy-making as one of the most dramatic responses ever, said David Kotok, chairman of Cumberland Advisors in Vineland, New Jersey.

The other main candidate had been Lawrence Summers, Obama's top White House economic adviser and a former U.S. Treasury secretary. But the choice of Summers would have been seen by many as threatening the Fed's independence.

Bernanke, 55, was appointed by Obama's Republican predecessor, President George W. Bush, to succeed Alan Greenspan, who stepped down in January 2006.

Widely respected as a top scholar on the Great Depression, Bernanke essentially rewrote the rule book of central banking by creating a host of innovative lending programs to unfreeze credit markets. Now, the Fed faces the challenge of unwinding its extraordinary support for the economy.

OUTSIDE THE BOX

While largely praised for decisive actions, Bernanke has also faced criticism for being slow to lower interest rates as the economy started to deteriorate in 2007, and for failing to spot the housing bubble and push for tougher mortgage lending rules when he was a Fed Board member earlier in the decade.

In his announcement on Tuesday, Obama will defend the central bank chief's actions -- and policies put in place by his own administration -- as steps of necessity, not choice.

Taken together, all of these steps have brought our economy back from the brink. They are steps that are working, Obama will say, according to prepared remarks.

(Additional reporting by David Lawder, Tim Ahmann and Anthony Boadle in Washington)

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