By Mark Felsenthal

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Monday said the U.S. economy's recovery remained fragile and unemployment may be high for some time, cooling anticipation of an early increase in U.S. interest rates.

Three days after news of a surprise fall in the jobless rate prompted investors to speculate the Fed might move more quickly to raise rates than had been expected, Bernanke said the Fed -- the U.S. central bank -- was sticking to its pledge to hold benchmark borrowing costs at exceptionally low levels for an "extended period."

"We still have some ways to go before we can be assured that the recovery will be self-sustaining," he told the Economic Club of Washington. "Also at issue is whether the recovery will create the large number of jobs that will be needed to materially bring down the unemployment rate."

A report on Friday showed the U.S. labor market last month turned in its best performance since the economy fell into recession two years ago as the unemployment rate receded slightly from a 26-1/2-year high and job losses slowed sharply.

The data led investors to ramp up bets benchmark U.S. rates would rise by the middle of next year, lifting the dollar to its biggest gain in nearly a year.

However, Bernanke on Monday suggested the Fed's policy-setting Federal Open Market Committee (FOMC), which meets next week to debate policy, would bide its time to let the recovery gather strength. His comments drove the dollar and prices for U.S. government bonds lower, while offering temporary support to stocks.

"Right now we are still looking at the extended period given that conditions remain -- low rates of (resource) utilization, subdued inflation trends, and stable long term inflation expectations," he said. "That remains where we are."

This view was echoed by another top Fed official, New York Federal Reserve Bank President William Dudley, speaking at Columbia University in New York on Monday evening.

"The recession now appears to be over, but the economy is still weak and the unemployment rate is much too high," Dudley said.

"These circumstances underpin the FOMC's commitment to keeping short-term rates exceptionally low for an extended period."

FORMIDABLE HEADWINDS

Bernanke said tight credit and the weak job market still posed "formidable headwinds" to recovery, but he said officials would need to consider recent signs that the economy was gaining strength at their meeting on Tuesday and Wednesday.

The Fed cut rates to near zero a year ago and has pumped more than $1 trillion into the economy to battle a deep recession. Now, analysts are beginning to wonder when it will begin to remove its extraordinary support.