ARLINGTON, Virginia (Reuters) - Federal Reserve Chairman Ben Bernanke said yesterday the US central bank may keep an emergency lending facility for big Wall Street firms open past year-end while it seeks to restore financial market stability.

In remarks to a mortgage lending forum sponsored by the Federal Deposit Insurance Corp., Mr. Bernanke said credit costs have been driven higher and the pace of US economic growth also has been hurt by market turmoil.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Mr. Bernanke said.

Mr. Bernanke's remarks calmed financial markets that had been rattled yesterday by the possibility that government-sponsored mortgage finance providers Fannie Mae and Freddie Mac would have to raise substantial new capital. Stocks rose, US Treasury securities eased and the dollar posted gains.

"The last thing he wants to do is walk away and see a dealer collapse," said Anton Schutz, portfolio manager at Mendon Capital Advisors in Rochester, New York. "Panic in the market is not over. It's all about safety and soundness," he said.

The Fed set up the so-called Primary Dealer Credit Facility, or PDCF, in March as part of its actions in facilitating the purchase of ailing investment bank Bear Stearns by JPMorgan Chase & Co. It said at the time the PDCF would continue for at least six months.

The lending program allows primary dealers - the biggest firms that deal directly with the Fed - to borrow directly from the Fed at the discount rate, currently 2.25 percent.

The Fed acted after weeks of turbulence in financial markets had raised fears a credit crisis stemming from rising mortgage defaults was spiraling out of control.

Borrowing at the the primary dealer facility averaged $1.7 billion a day in the week ended July 2, the Fed said last week.

Mr. Bernanke said yesterday that markets "have improved somewhat since March" but were still under strain.

He said the Fed, working with other regulators at home and abroad, "has redoubled its efforts to strengthen the capital positions, liquidity reserves, and risk-management practices" of financial institutions it supervises.