LONDON (Reuters) - The U.S. government should be careful about aiding the creditors of troubled banks despite a persistent credit crisis that will likely be a drag on economic growth for some time, a top Federal Reserve official said.

The United States is entangled in its worst financial crisis in several decades, the product of a highly leveraged market for mortgage-backed bonds that have plummeted in value and lead to widespread mistrust among banks.

The debacle culminated in the collapse of the country's fifth-largest investment bank, Bear Stearns (NYSE: BSC - news) <BSC.N>, which required an emergency buyout by rival JPMorgan Chase & Co. <JPM.N> that was funded by the Fed.

By creating the perception of a safety net, financial bailouts could lead to irresponsible risk-taking in the future, Minneapolis Fed President Gary Stern said in prepared remarks on Thursday.

"While governments cannot and should not uniformly avoid public support for creditors of failing banks, they should seek to minimize that support because of the distortions it produces," he told an audience at London's European Economics and Financial Centre.

His comments echoed the approach of Republican presidential nominee John McCain, who argued this week that the federal government had no business helping reckless investors and housing speculators.

Democratic presidential hopefuls Hillary Clinton and Barack Obama have urged a more proactive approach, saying an unfettered decline in housing prices risks sending the economy into a deep recession.

While reiterating the Fed's mantra that central banks cannot and should not target asset bubbles, Stern said regulators should explore ways to better spot overvalued sectors before they get out of hand.

"It (Frankfurt: A0MLX5 - news) is well within the realm of possibility for policy-makers to build support for, and at least a tolerance of, policies designed to address excess," said Stern, who is not a voting member of the Federal Open Market Committee this year.

In its effort to lubricate rusty credit markets, the Fed has already pumped hundreds of billions in liquidity and slashed interest rates by 3 full percentage points since September.

Still, the housing market shows little sign of stabilization, with home prices falling sharply and tarnishing the allure of structured products tied to real estate.

(Reporting by Jamie McGeever; Writing by Pedro da Costa; Editing by Tom Hals)