WASHINGTON (Reuters) - Restoring financial market stability is a top priority for the U.S. Federal Reserve as a weakening housing market, tighter credit and rising oil prices threaten the economy, Fed Chairman Ben Bernanke said on Tuesday.

"Accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy-makers," Bernanke said in remarks to the Senate Banking Committee. Bernanke was delivering his semi-annual testimony on economic conditions to lawmakers.

"The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately," he said.

Financial markets and institutions remain under "considerable stress," Bernanke said.

His comments come just two days after the Treasury Department, in close coordination with the Federal Reserve, announced measures to aid mortgage finance companies Fannie Mae and Freddie Mac, which have been under pressure as the housing market has deteriorated.

Bernanke's comments offered little comfort to investors anxious about the economy and the health of the financial and banking sectors. U.S. stock indexes fell to their lows of the day after his statement, while the dollar weakened and U.S. Treasury debt prices rose as a safe-haven alternative to riskier assets.

In its semi-annual monetary policy report to Congress, the Fed raised its projection for growth in 2008 to a range of 1 percent to 1.6 percent from the 0.3 percent to 1.2 percent range it forecast in April on expectations of stronger consumer spending.

With energy costs moving higher, the central bank also raised its inflation forecast to a range of 3.8 percent to 4.2 percent, up substantially from its previous 3.1 percent to 3.4 percent projection.

"The net is now extremely wide for the Fed, with upside inflation pressures and considerable downside growth risks," said Dustin Reid, senior currency strategist with ABN AMRO in Chicago. "The Fed's having a difficult time, as are most other central banks, as to what the next (interest rate) move should be."