Federal Reserve chairman Ben Bernanke has said he thinks the US recession is probably over, but a recovery will be moderate at best.

'From a technical perspective, the recession is very likely over,' Bernanke told questioners at a Brookings Institution conference in Washington. But he warned that it may not feel like the recession is over.

Mr Bernanke also said he saw 'encouraging' signs of activity in the US banking system as banks wind down their dependence on government emergency support.

His comments came as figures showed that sales at US retailers rose at their fastest pace in three and a half years in August, while a gauge of manufacturing in New York State hit a near two-year high.

The Commerce Department said total retail sales climbed 2.7%, the biggest monthly advance since January 2006, after declining by a revised 0.2% in July. Sales in July were previously reported to have eased 0.1%.

Sales in August were a bolstered by the government's 'cash for clunkers' programme, which gave consumers cash to swap ageing gas-guzzlers for new, more fuel efficient models. High petrol prices also added to the rise in sales.

Motor vehicle and parts sales surged 10.6% in August, notching their biggest rise since October 2001. The car scheme ended in August.

The retail sales report also showed signs of strength across almost all sectors, with the exception of furniture and building materials, evidence that household spending was probably mending.

Consumer spending accounts for about 70% of US economic activity. Excluding motor vehicles and parts, sales jumped 1.1% in August after falling 0.5% in July. Economists had expected a 0.4% increase.

Indications are that the economy is in the early phase of recovery from the worst recession in seven decades, but lacklustre household demand means the process will lack vigour. Rising unemployment is also decimating household incomes.

Meanwhile, a report from the New York Federal Reserve showed a gauge of manufacturing in New York State rose to its highest level in almost two years in September.

The New York Fed's 'Empire State' general business conditions index rose 18.88 in September - the highest since November 2007 - from 12.08 in August. Economists had expected a September reading of 14.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to US factory conditions.

Separately, US producer prices rose more than twice as much as expected in August on the biggest surge in petrol prices in more than 10 years and prices declined less than expected compared with a year ago, the Labor Department said.

Prices paid at the farm and factory gate jumped 1.7% last month and fell 4.3% from August 2008. Analysts had expected producer prices to rise 0.8% on the month and to fall 5.3% on the year.