"Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall. Almost none of the decisions he or any of us made have been easy," President Obama said.
Mr. Obama interrupted his family's vacation on Martha's Vineyard to make the announcement Tuesday morning with Bernanke by his side.
"As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that's exactly what he has helped to achieve."
U.S. stock markets traded in positive territory following the announcement and extended gains after a report showed that consumer confidence rose to its strongest levels since May.
During Bernanke's first term, the U.S. economy entered a financial crisis that began in the mortgage markets and spread to the broader financial system and consumers. Now, many economists are predicting that the economy is on its way to a recovery, though unemployment may remain high for longer than it takes other indicators to turn around.
Last week, Bernanke, a Republican nominated during President Bush's second term, gave an optimistic assessment of the economy, though he did caution that problems remain in the credit and job markets.
"After contracting sharply over the past year, economic activity appears to be leveling out both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Bernanke said.
Still, the Federal Reserve under Bernanke has received its share of criticism for its attempts to help financial institutions. There was some speculation that President Obama would nominate a Democratic economist to the post.
But changing the closely watched Fed chair at this point in the recession could inject more uncertainly into the unsettled U.S. economy.
"He's the best person for the job," John Makin, a senior fellow at the American Enterprise Institute, said of Mr. Bernanke, as quoted by the New York Times. "Why would anyone want to change the Fed chairman now?"
Bernanke's first term will expire on Jan. 31 and the Senate will need to confirm him for a second term. Senate Banking Committee Chairman Chris Dodd, D-Conn., said that his committee would give Bernanke a thorough hearing.
In a forum moderated by Jim Lehrer in late July, Bernanke reflected on his term and defended some of his more controversial actions to bail out banks.
"The problem we have is that in a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system," Bernanke said. "I was not going to be the Federal Reserve chairman who presided over the second Great Depression."
Bernanke was first nominated by former President George W. Bush in October 2005 to replace Alan Greenspan who held the post for more than 18 years. Before the nomination, Bernanke was an economics professor and served as the White House's top economic adviser. He also held a seat on the Federal Reserve's Board of Governors for three years.
---- Compiled from wire reports and other media sources