The Federal Reserve will watch the U.S. economy's progress through autumn and into 2011 as it decides how long it will hold interest rates at ultra-low levels, a top Fed official said on Tuesday.

In an interview with Reuters Insider television in London, St. Louis Federal Reserve Bank President James Bullard said the U.S. economic recovery was on track and that the Fed was keeping a close eye on risks stemming from the euro debt crisis.

He said the Fed could not make any promises on when it would change its monetary policy stance.

The economy is doing fairly well so far, Bullard said.

We have some risk, we have the situation in Europe we're watching very closely, but we'll see how things proceed through the fall and into 2011.

The Fed has chained rates to near zero since December 2008 to help steer the world's biggest economy through the financial crisis and resulting recession.

It has since maintained its pledge to keep rates low for an extended period, in part due to a lack of a pickup in domestic inflation.

In the latest Reuters poll, 10 out of 17 primary dealers see the first Fed rate hike coming in 2011.

Europe's troubles have strengthened the case for remaining on hold, prompting some economists to push back their rate hike forecasts.

Bullard said modest take-up of new dollar liquidity lines suggested there was less stress in the banking system than after the collapse of Lehman Brothers in September 2008.

There is no question it's stressful, but it's nowhere near as stressful as in 2008/2009, he said.

While acknowledging that CDS prices for major banks have risen as the debt crisis cranks up market volatility, Bullard said their rise had been limited compared with the aftermath of the Lehman collapse.

This was due to the euro zone's efforts to protect banks against failure, he said, adding that such a promise would prevent the euro situation from spreading around the world.

With that kind of guarantee, it's hard to see a banking crisis. It might be expensive, there might be other ramifications, but it's hard to see a global flare-up.

EURO RISKS

Earlier this month, Bullard said the $1 trillion emergency aid to prevent Greece's debt problems from spreading to other vulnerable euro zone countries had bought time for Europe to address its sovereign debt problems.

On Tuesday, he said risks remained that the situation may worsen, while adding that euro zone guarantees on the region's banking sector would likely prevent such a situation.

There is some risk that the European crisis will morph into something larger. But as of today, because of bank guarantees, I can't really see it going through into the global banking system, he said.

As the euro zone grapples with fiscal problems in Greece and other countries, Bullard said some form of sovereign debt restructuring in the 16-member bloc would not be disastrous.

If there is some restructuring some day, it's not really the end of the world. It can be done, he said. It's very painful for the country ... and it can incite a lot of volatility in the markets, but it's not the end of the world by itself.

Bullard said he did not see any risks of deflation at the moment, and while acknowledging that inflation remains low for now, it would pick up if the U.S. recovery continued on track.

Core inflation, which the Fed watches closely in gauging price risks, came in flat last month and has risen just 0.9 percent over the past 12 months, the smallest gain in more than 44 years.

(Reporting by Nick Edwards, editing by Susan Fenton)