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By Martin Dokoupil

ABU DHABI, Nov 16 (Reuters) - A Federal Reserve official said on Monday that the U.S. economy still faced "significant weaknesses" and urged policymakers to allow large financial institutions to fail if needed.

"We still have significant weaknesses to work through in the economy in the U.S. and coupled with a rapidly rising level ... (of) debt and enormous moral hazard issues, we have a great deal of work ahead of us," said Kansas City Fed President Thomas Hoenig.

Data showed last week that U.S. consumer sentiment had soured in early November on grim job prospects while a larger-than-expected trade deficit had analysts scaling back estimates for third-quarter U.S. growth. [ID:nN13463684]

Turning to regulatory issues, Hoenig said that all financial institutions needed to be allowed to fail, no matter their size.

"As we look at reform and the way forward I think the most important think we need to do is to make first of all an accurate assessment of fundamental weaknesses in our financial system and then begin to create better foundations," he said.

Hoenig was speaking at a central bank event in Abu Dhabi, the capital of the United Arab Emirates.

"Our institutions must be allowed to fail no matter what their size or political influence," he said.