By Patrick Rucker

WASHINGTON (Reuters) - The United States is experiencing a "significant" housing market downturn but the economy is fundamentally sound and should avoid recession, Treasury Secretary Henry Paulson will tell Congress on Thursday.

"The U.S. economy is fundamentally strong, diverse and resilient, yet after years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction," Paulson said in remarks prepared for delivery at a congressional hearing, obtained by Reuters on Wednesday.

"The housing correction, high energy prices, and capital market turmoil are weighing on current economic growth," he said. "I believe that our economy will continue to grow, although its pace in coming quarters will be slower than what we have seen in recent years."

Paulson is set to testify alongside Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox at a Senate Banking Committee hearing on the U.S. economy and financial markets at 10 a.m. (1500 GMT) on Thursday.

In his testimony, Paulson repeats a call for Congress to pass legislation to enable the Federal Housing Administration to play a larger role in helping distressed U.S. homeowners refinance mortgages and a separate bill to allow states to issue tax-exempt bonds to cover refinancing.

"All of these initiatives may help mitigate the housing headwinds, and we remain open to other good ideas as we move forward," Paulson said.

He said legislation signed by President George W. Bush on Wednesday that will provide tax rebates to more than 130 million Americans would "assist our economy quickly."

The U.S. mortgage industry had assisted 869,000 U.S. homeowners in the second half of last year and that progress was accelerating, Paulson said.