Although last week's devastating attacks on the United States will damage the economy in the short-term, U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday that the tragedy won't dampen bright long-term prospects.

"The shock of September 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in pronounced disengagement from future commitments,'' the Fed chief said in remarks prepared for delivery to the Senate Banking Committee. 

This pull-back from economic commitments will slow the economic pace, he said. 

"Indeed, much economic activity ground to a halt last week,'' Greenspan said. "But the foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past.'' 

Greenspan and Treasury Secretary Paul O'Neill together urged lawmakers, who are worried about how to help large and small businesses suffering because of last week's dislocations, not to rush into new stimulus measures before the full impact of last week's events becomes clear. 

``I would strongly suggest that while there is an obvious strongly desired sense to move rapidly, that it's far more important to be right than quick,'' Greenspan said. But he added: ``That does not mean that future actions are not going to be required.''

O'Neill said options under consideration included cutting taxes on capital gains from stock sales but, like Greenspan, he suggested moving in a measured way ``to make sure that in the name of trying to do right that we don't actually do damage.''

No Hint at New Fed Cut

The U.S. central bank on Monday slashed short-term interest rates and it has injected huge amounts of cash into the banking system to ensure ample liquidity to keep markets functioning. 

U.S. stock markets have fallen sharply since reopening on Monday after a four-day shutdown following the attacks. They continued to post losses on Thursday morning. 

But Greenspan's testimony offered no hints of whether the Fed was considering further rate cuts, although analysts expect more this year. 

The Fed chief cautioned lawmakers, who are pondering new stimulus measures, that it will take some time to know the full impact of the attacks which leveled the twin towers of the World Trade Center and damaged the Pentagon, leaving close to 6,000 dead or missing, on U.S. economic activity. 

O'Neill, who has been urging investors all week to "buy American,'' said the best thing ordinary citizens could do would be to carry on normally to help the nation back to its feet. 

"Each and every American should know that by continuing to work and spend, they are doing their part to restore our nation and our economy in the wake of last week's attack,'' he said.

'Encouraging' Signs

In his testimony, Greenspan noted that U.S. economic activity was weak even before the attacks. He cited sluggish production, employment and business spending. 

But on a positive note, he said consumer spending had risen in August and held its gains in early September and that there had been some improvement in factory orders while corporate profits were not sliding as quickly. 

"To be sure, these signs were tentative but, on the whole, encouraging,'' Greenspan said, who added that "we must not lose sight of our longer-run prospects, which have not been significantly diminished by these terrible events. 

"The markets are mostly functioning now, albeit in some cases using contingency arrangements, and, as in the past, the infrastructure will be rapidly restored," Greenspan said. 

"As the financial markets and payment infrastructure return to normal, loans are being repaid, and the temporarily bloated balance sheet of the Federal Reserve is now shrinking back to normal. 

"For the longer term, prospects for continued rapid technological advance and associated faster productivity growth are scarcely diminished. Those prospects, born of the ingenuity of our people and the strength of our system, fortify a promising future for our free nation." 

Greenspan met privately on Wednesday with congressional leaders, some of whom said afterward that he counseled them not to rush new stimulus proposals before knowing how the economy will perform after the attacks.

Reuters and The Associated Press contributed to this report.