The U.S. financial system remains fragile a year after a bank bailout program was initiated and the government needs to be ready to step in to help more if necessary, a senior U.S. Treasury department official said on Thursday.

The recovery has just begun, the financial system remains fragile, and the credit markets are not fully functioning, Herb Allison, assistant Treasury secretary for financial stability, told the U.S. Senate Banking Committee.

Allison said the Troubled Assets Relief Program, or TARP, had helped stabilize an economy that was in freefall when the Obama administration took office in January.

We still have a long way to go before true recovery takes hold, but we are now pointed in the right direction, he said.

Allison said TARP was intended as an emergency response to a major financial crisis and Treasury will exit from its bank investments as soon as it can.

Treasury has received over $70 billion in principal payments from banks that received taxpayer bailouts and almost $23 billion in proceeds from the repurchase of warrants by banks that have already repaid the principal investment.

For those banks that have elected not to repurchase their warrants, Treasury intends to begin auctioning those warrants later this year, Allison said.

He noted that significant parts of the financial system remain impaired and noted falling commercial real estate prices may additionally pressure banks' balance sheets.

In this context, it is prudent to maintain capacity to address new developments. Allison said, a possible sign that Treasury may want to keep the TARP funds available for use if needed for some time.

(Reporting by Glenn Somerville; Editing by James Dalgleish)