width=311Boosting credit to struggling small businesses is crucial to the economy's recovery and poses an important policy challenge, Federal Reserve Chairman Ben Bernanke said on Monday.

To support the recovery, we need to find ways to ensure that credit-worthy borrowers have access to needed loans, he told a Fed-sponsored conference on small business financing.

The conference caps more than 40 information-gathering meetings the Fed held across the country to try to find ways to overcome obstacles to lending.

A big drop in bank lending has aggravated the wobbly U.S. recovery. Total loans held by commercial banks fell by 5 percent in 2009 and lending has continued to contract this year, Fed officials have said recently.

Bernanke noted the important role small businesses play in job creation and said they continue to report that credit conditions remain difficult. The Fed takes very seriously complaints from bankers that bank examiners often prevent institutions from making good loans, he added.

However, he said lower loan demand, restricted credit availability and the weaker financial position of many businesses following the deep recession were all factors holding back lending.

Banks have found themselves particularly crimped by the declining value of real estate and other collateral they use to secure their loans, Bernanke said.

The Obama administration has backed legislation to create a $30 billion government fund and tax breaks for small businesses, but that faces an uncertain fate in Congress where lawmakers are anxious about adding to a huge federal deficit.

The Fed faces a quandary in dealing with a flagging recovery. It has already lowered interest rates to near zero and pumped more than $1 trillion of credit into the financial system to stimulate growth.

While most observers expect the Fed's next move will eventually be to tighten credit conditions, officials have acknowledged a softening in the recovery, raising the possibility they may have to take further steps to boost economic activity.

This spring, a banking crisis in Europe triggered by worries over some countries' ability to repay their debt delivered a broadside to an already sluggish U.S. recovery.

Many observers expect the Fed to have modestly lowered its forecasts for growth and inflation in projections to be made public this week.

(Reporting by Mark Felsenthal; Editing by Andrea Ricci, Philip Barbara and Jan Paschal)