(Adds Volcker comments, background)

By Kevin Drawbaugh

WASHINGTON, April 23 (Reuters) - Former Federal Reserve Chairman Paul Volcker, an Obama administration economic adviser, on Thursday urged banks to stick to basics and suggested possibly barring them from sponsoring hedge funds.

Wading into the intensifying debate on financial regulation reform, he raised concerns about giving the Fed new duties as a regulator of "systemic risk" and warned against being too clear about government protections for financial institutions.

"A certain degree of ambiguity, in that respect, I would hope, could help temper moral hazard concerns," he said in remarks at a conference on banking and financial oversight.

At 81, the tall and deep-voiced Volcker is a legend in financial markets. As head of the U.S. central bank during the Carter and Reagan administrations, he pursued an aggressive monetary policy that purged inflation from the U.S. economy.

President Barack Obama early in his administration named Volcker to be chairman of an Economic Recovery Advisory Board. He was recently tapped to head a panel on U.S. tax reform.

One of few policy-makers in Washington today to have lived through the Great Depression, Volcker said at the conference that the U.S. economy is mired in a "Great Recession."

As the administration tries to stabilize the financial system, Volcker warned the government should not be too clear on which institutions deserve taxpayer help, and which don't.