(Recasts with comments from Q&A on housing, China)

By David Lawder

WASHINGTON, March 28 (Reuters) - U.S. Treasury Secretary Henry Paulson said on Wednesday damage to the American economy from the housing market downturn and subprime mortgage foreclosures "appears to be contained".

Paulson, testifying before a House Appropriations subcommittee, said the Treasury was monitoring housing market developments closely but was encouraged by signs that the housing downturn was at or near a bottom.

"This is a complicated issue, but from the standpoint of the overall economy, my bottom line is we're watching it closely but it appears to be contained," he told the panel's financial services and general government subcommittee.

He said the Treasury had "grave concern" for the many Americans who will be adversely affected by the resetting of adjustable rate subprime mortgages, which are extended to borrowers with poor credit history.

"You have to balance that against the fact that the subprime market has made credit available to many Americans who are able to own houses now that they otherwise would be unable to own," he said, adding that rising consumer incomes and growing U.S. exports would help to limit systemic risks from subprime mortgages and the overall housing sector.

He added that the Treasury would work with bank regulatory agencies to review whether the current regulatory structure is adequate in addressing issues in the subprime mortgage market, such as predatory lending practices.

BUDGET INCREASE