US Federal Reserve chairman Ben Bernanke voiced his concern over American International Group Inc (AIG) saying that the failure of the insurance giant makes him angry.

"I think if there's a single episode in this entire 18 months that has made me more angry, I can not think of one, than AIG," Bernanke said in a testimony to the senate Budget Committee on Tuesday, after allocating $30 billion government bailout funds to the troubled insurer AIG. (See: US government injects additional $30 billion in AIG).

This is Fed's fourth attempt to stabilise the company since September, taking the total amount to about $160 billion.

However, Bernanke defended the decision, arguing that the insurer's failure may trigger an economic domino effect.

''We know that failure of major financial firms in a financial crisis can be disastrous for the economy,'' Bernanke said. ''We really had no choice.''

AIG reported an industry wide record $61.7 billion Q4FY08 loss, attributing that to losses on their credit default swaps that guarantee mortgage-backed securities. AIG sold these credit default swaps, which supposedly insured about $440 billion in bonds. The latest loss dwarfd the $24.5-billion loss AIG posted in the third quarter, when the government increased its rescue package for the insurer to about $150 billion.

When the securities inevitably plummeted in value, AIG could not cover what they promised. Credit default swaps are not regulated by the US government.

Many angry lawmakers, who disagree with the latest handout, feel AIG has acted irresponsible, and that no amount of government funds will turn the poorly run business around.

"Right now, small businesses across the country, who played by the rules, paid their bills on time, can not get a line of credit, while AIG seems to have an open spigot for taxpayer money," said senator Ron Wyden.

AIG even 'cleverly attached a hedge fund to their insurance company, taking advantage of a gap in federal and state oversight', Bernanke noted.

In exchange for the funds, the government will receive $26 billion in preferred stock in two AIG subsidiaries - American Life Insurance Co. and American International Assurance Co. AIG will not have to pay interest on the outstanding loan.

During another budget hearing before the House Ways and Means Committee, treasury secretary Timothy F Geithner also turned his anger on AIG.

"AIG is a huge, complex, global insurance company, attached to a very complicated investment bank hedge fund that built - that was allowed to build up without any adult supervision, with inadequate capital against the risks they were taking, putting your government in a terribly difficult position," Geithner said.

"And your government made the judgment back in the fall that there was no way that you could allow default to happen without catastrophic damage to the American people."

Bernanke gave a grim view of US economic prospects saying labour market conditions may have worsened in recent weeks.

He told Congress an economic recovery depends on the government's ability to stabilise weak financial markets. He said the efforts were needed to avoid 'a prolonged episode of economic stagnation'.

Bernanke's remarks came as the central bank announced it would begin lending up to $200 billion in an initial move to spur consumer and small business borrowing for autos, education, credit cards and other expenses. The Fed first announced the plan late last year.

Bernanke told the committee that restoring stability to the battered financial sector was a prerequisite to a recovery from the deep US recession, and said a surge in US government debt was unavoidable.

A budget proposal released by the White House last week envisioned a record budget deficit of $1.8 trillion this year, and a rise in the ratio of debt to gross domestic product to about 60 per cent from 40 per cent - the highest level since the early 1950s.

He said a decision on whether the government needs to increase the size of a $700 billion bank rescue package would depend on bank 'stress tests' being conducted by regulators and the direction of the economy.

"The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period."

In addition to the likelihood of a worsening jobs market, Bernanke said many businesses are burdened with excess inventories and are likely to cut production further in the months ahead.