CHICAGO (Reuters) - U.S. Federal Reserve
                  Chairman Alan Greenspan warned of dangers if the
                  U.S. economy should enter a period of falling prices,
                  reinforcing beliefs he is not inclined to raise interest
                  rates.
                     In his most detailed talk yet on the potential for
                  deflation, Greenspan said on Saturday a debate on the
                  issue was hampered by faulty price measures and
                  lacked clarity.
                     "Some observers have begun to question whether
                  deflation is now a possibility," the central bank chief
                  told the annual meeting of the American Economic
                  Association (AEA).
                     "Even if deflation is not considered a significant
                  near-term risk for the economy, the increasing
                  discussion of it could be clearer in defining the
                  circumstance," he added.
                     Deflation has not occurred in the United States on
                  a broad scale since the Great Depression of the
                  1930s.
                     Greenspan declined to say whether there was an
                  imminent risk of a deflationary cycle, but said it could
                  be at least as bad for the economy as inflation.
                     "Both rapid or variable inflation and deflation can
                  lead to a state of fear and uncertainty that is
                  associated with significant increases in risk premiums
                  and corresponding shortfalls in economic activity," he
                  said.
                     Economists listening to Greenspan's speech were
                  struck by the attention on deflation after decades in
                  which the Fed has made the fight against rising prices
                  its overriding mission.
                     "Today, he devoted a full 15 minutes to discussing
                  the negative consequences of deflation," said Peter
                  Kretzmer, an economist at NationsBank.
                     "It indicates that Greenspan will take a lot of care
                  before he decides to tighten monetary policy and there
                  is even a possibility of an easing."
                     Inflation, running at 2.1 percent, is at its lowest
                  level in a generation and Fed research suggests even
                  that figure may be double the actual rate of price
                  increases.
                     Asia's financial crisis has put a spotlight on
                  deflation as producers in the battered region are
                  expected to unload a glut of cheapened goods, bringing
                  down global prices.
                     Before the Asian troubles mounted, Fed
                  policymakers were leaning in favor of higher interest
                  rates because of worries that the nation's tight labor
                  market would generate wage pressures that could
                  feed inflation.
                     Allen Sinai, chief economist at Boston-based
                  Primark Decision Inc., said Greenspan's remarks on
                  Saturday clearly showed that deflation was at least on
                  the Fed's radar screen.
                     "It's a tip-off they will not raise interest rates," he
                  said. "The Fed will be on guard in either direction."
                     Fed policymakers next meet on Feb 3-4 to consider
                  interest rates. The key overnight federal funds rate
                  currently stands at 5.5 percent and has remained
                  unchanged since last March.
                     Discussing deflation, Greenspan drew a distinction
                  between declines in the prices of assets, such as
                  stocks and houses, and those of goods and services.
                     He said a gradual fall in asset prices had
                  contributed to the recent troubles in Asia but that in
                  most cases this type of deflation could be absorbed by
                  the economy.
                     "But historically, it has been very rapid asset price
                  declines -- in equity and real estate, especially -- that
                  have held the potential to be a virulently negative force
                  in the economy," he added.
                     The Fed is charged with seeking an environment of
                  stable prices, in which neither inflation nor deflation is
                  a threat, while maintaining the maximum level of
                  employment.
                     Greenspan said the "remarkable progress" that had
                  been made in bringing down inflation had brought the
                  issue of price measurement into especially sharp
                  focus.
                     He said there were "uncertainties surrounding the
                  accuracy of our measured price indexes," adding his
                  weight to criticism of the main U.S. inflation gauge,
                  the consumer price index.
                     Inflation had declined to the point where even an
                  upward bias of a few tenths of a point mattered, he
                  said. "Inflation has become so low that policymakers
                  need to consider at what point effective price stability
                  has been reached," he noted.