(Updates with more comments from Bullard, adds byline)

By Kristina Cooke

NEW YORK, Feb 17 (Reuters) - The Federal Reserve needs a more systematic approach to expanding U.S. money supply to avoid deflation as it combats a global recession that looks likely to last at least through the first half of 2009, a top Fed official said on Tuesday.

"A key near-term risk for 2009 is disinflation and possibly deflation," St Louis Federal Reserve President James Bullard said to the New York Association for Business Economics.

"While the monetary base has expanded at an extraordinary fast pace during the fall and winter, much of that expansion has been closely related to the Fed's lender of last resort function, and cannot be counted on to keep expectations of disinflation and deflation at bay."

"Because of this, the Fed needs a more systematic method of keeping the persistent component of monetary base growth rates elevated in order to combat the risk of a deflationary trap."

The U.S. central bank has lowered interest rates almost to zero and pumped hundreds of billions of dollars into financial markets in its efforts to unfreeze credit markets and battle a crippling recession.

"I believe it is fair to conclude we are entering an extended period of exceptionally low policy rates globally," said Bullard, who does not have a vote on the Fed's policy-setting committee this year.

"In the United States, the setting of nominal interest rate targets as a monetary policy tool will be off the table for some time." Given the extraordinary circumstances, he said, the Fed should "provide a credible nominal anchor for the economy."