While Mr Greenspan stressed he was not predicting a stock market crash, he advised banks to set aside more money as insurance against a big market downturn.

His comments were interpreted by markets as a sign he is worried about a potential bubble in equity prices.

Fears of weaker US stocks sent Japanese share prices lower. Japan's benchmark 225-issue Nikkei Stock Average was down 0.77%, to 17,642.87 at the end of morning trade.

Mr Greenspan told a US banking conference that sudden losses in investors' confidence "inevitably" occur from time to time and financial institutions should boost their reserves to take account of that possibility.

"History tells us that sharp reversals in confidence occur abruptly, most often with little advance notice," he said.

The Fed chairman pointed out that equity premiums, the return investors demand to cover the risks associated with investing in stocks, had declined in recent years but he said it was unclear why.

"The key question is whether the recent decline in equity premiums is permanent or temporary," he said.