Europe needs to take the reins to tackle its debt crisis and prevent a spread that could damage the global economy, senior U.S. officials said on Thursday, as they stressed that more funding from international lenders is not what Europe needs.

One official also told the hearing by the Senate Banking Committee that an economic slowdown in Europe could affect some U.S. foreign policy goals.

Lael Brainard, Treasury's under secretary for international affairs, described the U.S. economic stake in Europe as immense and said although the U.S. recovery has strengthened recently, it remained vulnerable to a potential worsening of conditions in Europe.

But she stressed Europe's ability to address its own problems.

The challenge Europe faces is within the capacity of the Europeans to manage, and the administration has been clear with our international partners that we are not seeking additional funding for the IMF, Brainard told the hearing.

Resources of the International Monetary Fund cannot substitute for a strong and credible European firewall and response, she added.

Brainard, who is Treasury's top diplomat abroad, also said that although the direct exposure of U.S. banks to the European countries already under bailout programs, such as Greece, are modest, there is still a wider potential impact.

Our banking system still has material exposure to the core of Europe and to the broader banking system, which could be impacted if financial stress were to broaden in Europe, Brainard said.

Recent attention has focused on efforts by Greece to clinch a $170-billion bailout and on the social unrest unleashed as international lenders have called for austerity measures.

In response to questions, Brainard conceded that Greece faces very daunting economic short-run prospects and suggested said some better-off European countries could help by stimulating their own economies.

There has been some talk by European leaders about a growth agenda but we think there's more scope in the short run for the internal dynamics of the euro area to (seek) stronger growth in the surplus countries, she said.

Countries in the southern periphery of the euro zone region, including Greece, Italy and Portugal, are struggling with heavy debt loads, but northern European countries like Germany and France are on much sounder economic ground.

The hearing also included officials from the State Department and the Federal Reserve, giving lawmakers a chance to assess conditions if Europe's distress deepens.

Under Secretary of State Robert Hormats said slower European growth and tighter budgets could have an impact on some of our foreign policy goals and made clear that the United States expects its overseas partners to meet commitments.

Whatever happens on the financial and economic front, our foreign policy message has been clear: It is important that transatlantic partners continue to dedicate resources to key priorities, and maintain critical deployments, both military and civilian, Hormats said.

So far, there was no evidence that Europe was any less willing to impose tough sanctions on Iran, and the United States will continue to increase that pressure on Iran, Hormats said.

Steven Kamin, director of the Fed's division of international finance, told the committee that financial stresses in Europe were undoubtedly spilling over to the United States and could continue doing so.

Difficulty acquiring dollar funding by European and other financial institutions may ultimately make it harder and more costly for U.S. households and businesses to get loans, Kamin said.

He said that while it was difficult to gauge all the effects from Europe's problems on U.S. affairs, it is clear that the situation in Europe poses a significant risk to U.S. economic activity and bears close watching.

(Editing by Leslie Adler)

Portugal Germany