Federal Reserve Chairman Ben Bernanke, making his case for a second term, defended his record on Thursday before a skeptical Senate that criticized the central bank for failing to prevent the financial crisis.

The soft-spoken Fed chief, who is widely expected to win Senate backing, argued that the U.S. central bank's aggressive actions to combat the financial crisis had been crucial to preventing an even more severe economic slump.

We played a central role in efforts to quell financial turmoil, Bernanke told the Senate Banking Committee. As serious as the effects of the crisis have been ... the outcome could have been markedly worse.

Bernanke faced pointed, sometimes angry, questions from senators, many of whom accused the Fed of regulatory failures they say laid the groundwork for last year's financial meltdown. Still, several expressed support for his nomination, and credited him with acting decisively to battle the crisis.

For Reuters Insider Television video of Bernanke testimony click on: http://link.reuters.com/mab84g

The Fed chairman, whose four-year term expires at the end of January, admitted to some lapses by the central bank but said a hands-on supervisory function was crucial to its ability to safeguard financial stability.

We need to have the expertise, information and authority associated with a bank supervisor, the former Princeton economics professor told the lawmakers, who are considering stripping the Fed of its power to regulate banks.

The crisis, which erupted on Bernanke's watch, provided fertile ground for tough questioning from both Democrats and Republicans on the committee, which needs to approve the nomination before it can be considered by the full Senate.

The panel's top Republican, Senator Richard Shelby of Alabama, wondered why the Fed spent so little time discussing regulation at its periodic policy meetings.

Would it be fair to say that before the crisis, in the last couple of years, not a lot of time was spent on regulatory supervision? asked Shelby.

Despite the aggressive questioning several senators praised Bernanke's tactics in battling the financial crisis, the worst in generations, and he answered the critiques calmly.

Under his tenure, the Fed has slashed benchmark interest rates to near zero and pumped more than $1 trillion into the financial system. Still, the economy has suffered its deepest recession since the Great Depression and the unemployment rate has soared to a 26-1/2-year high of 10.2 percent.

ANGRY AT BAILOUTS

Pressured by angry constituents, lawmakers are upset over taxpayer bailouts of financial firms such as insurer American International Group and what they see as lax regulation that laid the groundwork for the credit crisis.

Senator Bernie Sanders, an independent from Vermont who is not a member of the banking committee, has said he would place a hold on Bernanke's nomination. That move could force Senate leaders to round up 60 votes just to consider the nomination, which would likely slow the confirmation process.

Republican Senator Jim Bunning of Kentucky, a long-time Fed critic and the only panel member to oppose Bernanke four years ago, went further, saying he would do everything possible to block and stall his reappointment.

From monetary policy to regulation, consumer protection, transparency and independence, your time as Fed chairman has been a failure, Bunning said.

Despite such voices of discontent, the nomination appears set to overcome any hurdles. Committee Chairman Christopher Dodd opened the hearing by making clear he would support the nomination, saying the reappointment would send the right signal to financial markets.

Speaking to reporters on the sidelines, the Connecticut Democrat said he believed Sanders' effort to block the nomination would not succeed.

I think the majority of the members will support the chairman, Dodd said.

Senator Judd Gregg, Republican from New Hampshire, also appeared to firmly support Bernanke's reappointment.

The fact is you did take the action that was necessary, and it was a very creative and aggressive action, Gregg said.

FED INDEPENDENCE

Dodd's panel needs to approve the nomination to send it before the full Senate. If the Senate does not confirm him by January 31, Bernanke could continue to serve unless replaced.

Even if the confirmation does sail through, Bernanke faces the prospect of running a diminished institution if some of the congressional proposals to curtail the Fed's powers and political independence become law.

Dodd has proposed stripping the Fed of its regulatory powers in favor of unifying fragmented U.S. bank oversight under one roof.

He would also require presidential appointment and Senate confirmation of regional Federal Reserve bank board chairmen, taking away a prerogative enjoyed by the 12 regional Fed banks. Bernanke defended the Fed's current governance structure.

More worrying to Fed officials, legislation the U.S. House of Representatives could vote on next week would submit the Fed's monetary policy decision-making to review by a congressional watchdog agency.

Bernanke, who has warned the measure could spook investors and drive up interest rates, sought on Thursday to erect a roadblock to the measure in the Senate, saying:

The Fed's credibility depends on the market's perception that we are independent in making monetary policy decisions.

(Additional reporting by Kevin Drawbaugh in Washington and Steven C. Johnson in New York; Editing by James Dalgleish)

Ben Bernanke