Uncertainties over a possible war against Iraq are weakening a major pillar of US economic growth, iconic banker Alan Greenspan has warned.

Mr Greenspan, chairman of the US Federal Reserve, has said that political instabilities have only acted as a further brake on business investment, a significant prop to economic growth.

Considerable uncertainties surround the economic outlook, especially in the period immediately ahead Alan Greenspan, chairman, Federal Reserve

The cocktail of "uncertainties" has created "formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity", Mr Greenspan told US policymakers.

"While household spending has been reasonably vigorous, we have yet to see convincing signs of a rebound in business outlays."

Market reaction

He added that Iraq-related concerns were rendering it "especially difficult" to forecast US economic performance.

"We do not know what the underlying strength of the economy is."

While the Fed believes the US economy will "probably" return to more rapid growth, Mr Greenspan said it was still possible that war uncertainties were masking "persisting strains and imbalances".

"Considerable uncertainties surround the economic outlook, especially in the period immediately ahead," he added.

The comments, made in twice-yearly comments to Congress, were viewed with caution by investors, and US shares lost early gains after Mr Greenspan's speech was released.

Stocks lost further ground after the release of a tape said to be by Osama bin Laden was viewed as raising the chances of war against Iraq.

The benchmark Dow Jones industrial average share index, which had risen 60 points in early trade, closed 77 points lower at 7,843.11 points.

"[Mr Greenspan] sounded less optimistic near-term than people expected," said Joe LaVorgna, senior US economist at Deutsche Bank Securities.

Alan Ruskin, research director at New York-based 4Cast, said: "The tone was more cautious than optimistic."

But the Fed nonetheless forecast that the US economy would grow by 3.25-3.50% this year, compared with 2.8% in 2002.

Economic time bomb

Under questioning by senators, Mr Greenspan backed the removal of tax on share dividends, a key proposal in a controversial $695bn tax reform package backed by US President George W Bush.

The move would tackle a "major factor restraining flexibility in out economy", Mr Greenspan said.

"The one thing I have seen over the last two to three years is how really important [flexibility] apparently is."

But he warned against worsening the US budget deficit, in the face of an ageing population which would, from 2010-12, present "major problems" to social security and healthcare services.

"Because the baby boomers have not yet started to retire in force... we are in the midst of a demographic lull," he said.

But, barring an economic miracle, "the aging of the population... will end this state of relative budget tranquillity in about a decade's time".

"It would be wise to address this significant pending adjustment sooner rather than later."