The Fed chairman has urged budget discipline and questioned the timing of Bush's fiscal stimulus plan, during a Senate address.

Uncertainties over a possible war with Iraq posed "formidable barriers" to business spending and made it tough to gauge the US economy's health, according to Mr Alan Greenspan, chairman of the US Federal Reserve Board.

In remarks that seemed to strike at Bush administration plans for a $695 billion package of taxcuts, Mr Greenspan yesterday urged budget discipline and said until what ailed the economy was clearer, it was "premature" to prescribe fiscal stimulus.

"The heightening of geopolitical tensions has only added to the marked uncertainties that have piled up over the past three years, creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity," the Federal Reserve chief told the Senate Banking Committee.

He questioned the need to apply a jolt of fiscal stimulus before it becomes possible to sort the impact of war worries from other factors adversely affecting the economy.

"Unless and until we can make a judgment as to whether there is underlying deterioration going on - and my own judgment is I suspect not - then stimulus is actually premature," Mr Greenspan said in response to questions.

"If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly - our more probable expectation - or one that is still labouring under persisting strains and imbalances that have been misidentified as transitory," he said.

The Federal Reserve chief was delivering his semiannual testimony on the economy before the Senate and will repeat it on Wednesday to the House Financial Services Committee.

In a forecast submitted to the committee, the Fed estimated the nation's economy will expand by an inflation-adjusted 3.25 per cent to 3.5 per cent in 2003 but unemployment will stay at about 5.75 per cent to 6 per cent. Last July, the Fed forecast GDP growth of 3.5 per cent to 4 per cent for this year and a jobless rate of 5.25 per cent to 5.5 per cent.

Mr Greenspan said if geopolitical risks waned, there was reason to think business spending will pick up because of favourable financial conditions with ample liquidity and narrowing risk spreads on corporate bonds.

"These factors, if maintained, should eventually facilitate more vigorous corporate outlays," he said. Mr Greenspan said methods to establish curbs on deficits and on spending need to be "reinstated without delay."

"I am concerned that, should the enforcement mechanisms governing the budget process not be restored, the resulting lack of clear direction and constructive goals would allow the in-built political bias in favour of growing budget deficits to again become entrenched," Mr Greenspan said.

The Fed chief skirted direct comment on Bush's tax cut package in his prepared remarks, but faced persistent questioning, especially from Democrats who charge it will bloat the government's budget deficits.

Although he questioned the timing of the Bush stimulus plan, Mr Greenspan said he backed the idea at its core - the elimination of double taxation of dividends. However, he said the effect must not impact tax revenues.

"I support the program to reduce double taxation on dividends and the necessary other actions in the federal budget to make it revenue neutral," he said. "I think that that would be a significant value to the American economic system." Dividends are now taxed as profits when companies earn them and again when given to shareholders as dividends.

In remarks that focused on the shadows over the economic outlook, Mr Greenspan said policymakers may not get a clear picture of prospects until the Iraqi situation is resolved.