President Bush today defended the Federal Reserve System’s decision to provide an $85 billion credit line for American International Group Inc.

Letting AIG, New York, fail “could have caused a severe disruption in our financial markets and threatened other sectors of the economy,” Bush said.

Bush justified the deal as part of “extraordinary measures” the “federal government has taken to address the challenges confronting our financial markets.”

“These actions are necessary, and they’re important,” Bush said. “And the markets are adjusting to them. Our financial markets continue to deal with serious challenges. As our recent actions demonstrate, my administration is focused on meeting these challenges. The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence.”

Congressional leaders plan to hold hearings on the AIG credit line and the current financial markets turmoil next week.

House Speaker Nancy Pelosi, D-Calif., said Wednesday that the Fed’s AIG credit line deal “raises certain questions.”

The administration justified the deal by noting that many AIG customers and counterparties are based outside the United States, Pelosi said.

“Why aren’t these foreign institutions participating in this bailout?” Pelosi asked. “Where is this money coming from? What is its impact on our budget?”

Pelosi said the hearings also will look at potential industry fraud and mismanagement.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, asked Wednesday whether Federal Reserve Chairman Ben Bernanke should have so much power to act unilaterally.

“No one in a democracy, unelected, should have $800 billion to dispense with as he sees fit,” Frank said, referring to the pool of money the Fed has had at its disposal to deal with financial crises.