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"I think the oil price rises we've seen so far don't pose a risk to the recovery," he told reporters after a speech on regulation.

"Oil price changes could have the potential, if they were very large, for slowing the recovery, but we have a lot of experience and a lot of data on past instances, and I think it's a manageable risk," he added.

Lacker said that pass-through from higher food and energy prices into broader inflation is limited but that there is a danger that prices that consumers are keenly aware of -- such as what they pay for gasoline -- could spur fears of wider inflation, which ultimately could push prices up.

"There's a risk that the high visibility of gasoline and food price increases would pose a little more risk for inflation dynamics this time than in the past," he said.

A rise in inflation expectations can be self-fulfilling if it leads businesses to raise prices and workers to demand higher wages. However, with the U.S. unemployment rate at 9 percent, many Fed officials do not see much scope for wage increases.

Yellen said she did not intend to provide any new information about the outlook for the economy or monetary policy in her speech.

Lacker, who is not a voter on the Fed's interest-rate setting panel this year, is known as one of the staunchest skeptics of the Fed's easy-money policies. His comments illustrate a likely course of debate at the Fed's meeting in mid-March over whether the biggest risk to the economy is a setback to the recovery or a surge in inflation.

Some Fed policymakers have suggested it might be time to reduce or taper off their $600 billion bond buying program in light of a strengthening recovery, but others feel higher oil prices could create headwinds to the recovery.

Oil prices retreated from 2-1/2-year peaks of almost $120 a barrel hit in London on Thursday to hover below $112 on Friday on Saudi efforts to plug supply gaps. However, turmoil in the Middle East and Northern Africa has added to worries about higher fuel prices and inflation risks around the world.

Another senior Fed official, Vice Chair Janet Yellen, said the Fed's long-term commitment to loose financial conditions will shift when the time comes for the central bank to withdraw its support for the U.S. economy.

"Once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the (Fed) will naturally need to adjust its 'extended period' guidance and develop an alternative communications strategy," she told the Booth School conference.

Yellen said she did not intend to provide any new information about the outlook for the economy or monetary policy in her speech.

Lacker also said stress tests for banks come at a cost but are valuable for preventing financial panics.

"Quantifying the risks at large financial institutions is a complex and costly process that is vulnerable to manipulation," he said at the event sponsored by the University of Chicago's Booth School of Business.

Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

Federal Reserve officials have been concerned the economy is expanding too slowly to bring down unemployment significantly. The report supported the view that the central bank will complete its $600 billion government bond-buying program to further stimulate demand by lowering interest rates.

"A bit disappointing, but largely old news at this point that will take a back seat to fears about growth beyond the first quarter in the wake of both oil price hikes and a budget impasse that could cut into government spending," said Avery Shenfeld, an economist at CIBC World Markets in Toronto.

U.S. government debt prices pared losses on the data, while the dollar extended losses against the yen.

The government revised fourth-quarter growth to reflect a steeper contraction in government spending than previously estimated. Government spending declined at a 1.5 percent rate rather than 0.6 percent, due to weak state and local government outlays, and subtracted 0.31 percentage points from GDP.

In addition, consumer spending -- which accounts for more than two-thirds of economic activity -- grew at a 4.1 percent rate in the final three months of 2010 instead of 4.4 percent.

It was still the fastest since the first three months of 2006 and was an acceleration from the third quarter's 2.4 percent rate. But there are concerns that surging crude oil prices could hurt consumer spending and slow the economy's recovery.

The government revised business investment up, though spending on equipment and software was lower. Business spending increased at a 5.3 percent rate instead of 4.4 percent.

Business investment grew at a 10.0 percent pace in the third quarter. Spending on software and equipment increased at a 5.5 percent rate instead of 5.8 percent.

Business inventories subtracted 3.70 percentage points from GDP growth, unrevised from last month. Business inventories increased $7.1 billion instead of the $7.2 billion estimated last month.

Excluding inventories, the economy expanded at a 6.7 percent pace rather than 7.1 percent. It still marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 percent rate instead of 3.4 percent.

Exports were revised higher, but the upward revision to imports was even greater. Trade added 3.35 percentage points to GDP growth instead of 3.44 percentage points.

The report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at an unrevised 1.8 percent rate in the fourth quarter. That was a sharp gain from 0.8 percent in the third quarter.

But a "core" price index closely watched by the Fed advanced at revised 0.5 percent rate instead of 0.4 percent. The increase, which matched the third quarter, was still the smallest rise on record.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

* Early losses on the S&P 500 .SPX, triggered by deepening concerns that higher oil could stifle economic activity, eased in late-day trading on Thursday as Brent crude prices came off 2-1/2 year highs of $120 a barrel.

* The index is down 2.7 percent for this week, partly on worries that political unrest in oil-rich Libya could spread to major oil-producing countries and result in persistently higher energy prices at the expense of fragile global economic growth.

* Brent crude hovered at around $112 on Friday, with the crisis in Libya continuing to underpin prices.

* The U.N. Security Council was to meet on Friday to discuss a draft proposal for sanctions against Libyan leaders, locked in a bloody battle for survival against a popular uprising.

* In company news, Boeing Co (BA.N) rose 3.4 percent after the bell on Thursday as the firm said it won a $30 billion contract for 179 new U.S. Air Force refueling planes.

* Bailed-out insurer American International Group Inc (AIG.N) rose 1.4 percent in extended trade after the firm said it earned $11.2 billion in the fourth quarter on asset sales, though charges to expand its reserves for old asbestos claims pushed its underlying operations into another loss.

* News Corp (NWSA.O) has kicked off the process to explore the sale or spin-off of its troubled social entertainment site, Myspace, a person familiar with the talks said on Thursday.

* Almost a third of Apple (AAPL.O) shareholder votes cast were in favor of a proposal to disclose a succession plan for Chief Executive Steve Jobs, underscoring investors' worries over who will replace the visionary leader at the helm.

* Macroeconomic data due on Friday include U.S. fourth-quarter preliminary gross domestic product (GDP) figures at 8.30 a.m., and February's final Reuters/University of Michigan consumer sentiment survey at 9.55 a.m.

* Among the companies scheduled to release earnings results include retailer JC Penny (JCP.N)

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 was up 0.5 percent in early trade, taking a breather after a week-long retreat, though trading in British shares was halted due to technical issues on the London Stock Exchange (LSE.L).

(Reporting by Harpreet Bhal)

After a surge in Brent oil prices to 2- year highs near $120 a barrel, South Korea, the world's fifth-biggest crude importer, warned that its inflation situation was getting tougher.

Business executives fretted about rising prices and investment banks said oil was reaching an inflection point that could endanger the world's recovery from the global financial crisis.

"We actually think that we'll be able to ride out the Libya situation and it will stabilize," Obama, referring to fuel prices, told a group of corporate chief executives.

His Treasury Secretary said the world had plenty of oil reserves.

"We have substantial capacity across the major economies in the strategic reserves," Timothy Geithner said.

"Hopefully, by reminding people of that and calling attention to the fact that there's a fair amount of excess capacity in parts of OPEC ... hopefully that will make it less likely the market ... starts to build in higher prices over time."

The key risk for the world economy is a sustained rise in the price of oil. But after shooting up to close to $120 a barrel in intraday trade on Thursday, Brent crude futures ended the day at less than $112, showing just how fraught investors nerves are.

The sharp fall came after market rumors that Libyan leader Muammar Gaddafi had been shot dead and on news that top producer Saudi Arabia could cover any supply disruptions.

On Friday, Brent crude was trading around $112. U.S. crude futures eased to $97.60 from a Thursday high of $103.41.

In Libya, forces loyal to Gaddafi hit back in fierce gun battles with rebels holding towns near the capital but there were no signs they had broken the opposition momentum.

The Organization of the Petroleum Exporting Countries (OPEC) has an estimated 4-6 million barrels per day of spare crude production capacity, more than enough on paper to cover Libya's output of 1.6 million barrels a day.

But markets are worried that the unrest might spread to bigger producers in the region that would have a much bigger impact on the world economy.

After public uprisings have already toppled leaders in Egypt and Tunisia, governments in the region are taking notice.

Saudi Arabia this week unveiled a $37 billion package to try to insulate the kingdom from the wave of protests across the Arab world, while Algeria lifted a 19-year-old state of emergency as it tried to appease opposition groups.