Europe is a potential risk to the global economy and it is up to European governments to follow a plan that reassures financial markets they can repay their debt, St. Louis Federal Reserve President James Bullard told reporters in Tokyo.

Investors are on edge amid doubts about whether Spain can afford to bail out its banking sector and whether voters in Greece will reject strict fiscal austerity measures in an election in mi-June.

Bullard, who is not at present a voting member of the policy-setting Federal Open Market Committee but will be next year, said he still expects the U.S. economy to grow and for the unemployment rate to steadily fall this year.

"Recent data have been somewhat mixed, but not enough for me to change my forecast of achieving moderate growth," Bullard told reporters.

"However, what is not so good is the situation in Europe. The situation in Europe is grave, and we need vision and rapid action so this does not turn into a meltdown for the global economy."

RISKS

It is up to Greek voters to decide whether or not they want to remain in the common currency zone and other European countries should have plans in place in case Greek voters back political parties that want to abandon fiscal austerity, Bullard said.

When asked whether the Fed also needs a contingency plan, Bullard said the U.S. financial sector is much healthier that it was three years ago and that stress tests on banks showed the United States is about as prepared as it can be.

Bullard declined to recommend specific policies to Europe, but he did say that European countries cannot rely on the European Central Bank to solve problems with fiscal policy.

Bullard reiterated his forecast that the U.S. economy will grow 3 percent this year and the jobless rate will fall to 7.8 percent as a moderate recovery takes hold.

The Fed cut overnight interest rates to near zero in December 2008 and has bought $2.3 trillion in government and mortgage-related debt in a policy called quantitative easing to push other borrowing costs lower and spur a stronger recovery.

Bullard said he expects interest rates to rise in late 2013, not late 2014 as the Fed's policy committee is currently indicating.

The Fed's next policy meeting is June 19-20. Two days earlier, on June 17, Greece holds an election that could signal its departure from the euro if voters support parties opposed to the strict terms of the country's bailout.

The U.S. experience with quantitative easing shows that the Bank of Japan's purchases of government debt will eventually help it achieve its goal of a 1 percent rise in consumer prices, Bullard said.

(Editing by Michael Watson & Kim Coghill)

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