Federal Reserve Chairman Ben Bernanke on Tuesday defended U.S. regulators’ response to suspicions in 2008 that a key global interest rate was being manipulated.

But Bernanke said even today he can’t guarantee that Libor rates are accurate because few of the reforms proposed by U.S. regulators at the time were accepted by British banking officials.

Bernanke in testimony before the Senate Banking Committee painted a picture of an aggressive response by the New York Federal Reserve, which the Fed chief said said quickly offered proposals for structural reform for setting interbank borrowing rates.

“There was a substantial response by the Federal Reserve Bank of New York,” Bernanke said.

Current Treasury Secretary Timothy Geithner has been targeted for criticism since it was revealed last week that he, as head of the New York Fed in 2008, was aware of allegations the Libor rate was being manipulated.

Bernanke said the British Bankers Association, which oversees the setting of Libor rates, failed to act on the reform proposals forwarded by Geithner.

Huge British bank Barclays (NYSE: BCS) has admitted to manipulating the rate both for its own profit and to hide its actual borrowing rates during the worst of the financial crisis.

Bernanke explained during his testimony that regulators in 2008 were only aware that some banks may have been low-balling their borrowing costs when reporting to Libor in order to maintain an appearance of fiscal health.

At the time, if a bank's borrowing costs were rising it meant lenders were worried about that bank’s ability to repay the loan, information that could have spooked markets and led to a Bear Stearns-like run on banks seen as unhealthy.

Regulators have been criticized for apparently turning a blind eye to this sort of manipulation.

Allegations that Barclays traders routinely asked their colleagues to lowball the bank’s borrowing rates to benefit positions held by the traders have surfaced only recently.

Bernanke agreed that the scandal has contributed to a loss of faith among investors that markets aren’t rigged.

Bernanke also reiterated his long-held position that the Federal Reserve is poised to introduce additional stimulus programs, in particular if labor markets continue to stumble and inflation or deflation is on the rise.

Bernanke said Europe’s ongoing debt crisis as well as uncertainty related to U.S. fiscal policy are contributing to the slugging rate of U.S. economic growth.

As usual, Bernanke was intentionally vague about the timing and precise catalyst for another round of bond purchases, known as quantitative easing. He’s said for months that the Fed is willing to do it if necessary, but he’s given no indication what might lead to it.

The central bank is “prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability," Bernanke said in prepared remarks.

Investors initially responded to Bernanke’s gloomy testimony by pushing stocks down. But markets later recovered and the Dow Jones Industrial average was up more than 60 points in midday trading.

Some Senators questioned whether the Fed believed more stimulus would be effective, while at the same time questioning whether the two earlier rounds of quantitative easing were successful.

Bernanke said he and most of his colleagues believe the Fed’s stimulus initiatives have helped promote growth but haven’t been as successful as they had hoped.

The Fed has held overnight borrowing costs near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related debt in an effort to push long-term interest rates lower. As the recovery has stalled, the Fed has promised to keep the rates at 0%-0.25% until at least late 2014.

Bernanke told lawmakers recent deterioration in the labor market suggests the nation's 8.2 percent jobless rate will only fall gradually, much slower than would be helpful to an ailiing economy. He admitted for the first time that the softness could not be explained away by purely seasonal factors.

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