By Ann Saphir

SAN ANTONIO (Reuters) - The White House has handled the process of picking the next chair of the Federal Reserve "terribly," a top official at the U. S. central bank said on Monday in an unusual public critique of the delicate, and traditionally discreet, selection process.

President Barack Obama's effort to settle on a candidate to succeed Fed Chairman Ben Bernanke when his term expires in January became front-page news after leaks that suggested former Obama adviser Lawrence Summers was the preferred candidate.

The news accounts spurred a public campaign on behalf of Fed Vice Chair Janet Yellen and drew a torrent of criticism against Summers from liberal Democrats who dislike him for a record of favouring financial deregulation and for remarks in the past that some saw as sexist.

Twenty Senate Democrats signed a letter to Obama in July urging him to pick Yellen, and Summers unexpectedly withdrew his name from consideration on September 15, citing a potentially acrimonious Senate confirmation.

"The White House has mishandled this terribly," Dallas Federal Reserve Bank President Richard Fisher told the Independent Bankers Association of Texas. "It just makes it sound like we are a political instrument. We are not, we cannot be, we should not be, we must never be a political instrument."

His remarks were rare for a senior official of the Fed, which takes great care to stay above the political fray in order to preserve the institution's independence.

But they reflect real discomfort within the central bank over the manner in which the process has played out publicly, after Obama unexpectedly said in June that current Fed chief Ben Bernanke had already stayed in the job "a lot longer than he wanted or he was supposed to."

In the wake of Summers' withdrawal, the White House has made clear that Yellen is the leading contender. Obama is expected to make an announcement soon, although a source familiar with the process said an announcement was unlikely this week.

As someone perceived as a policy dove, Yellen is at the opposite end of the spectrum from the hawkish Fisher. But Fisher made clear he admires her, adding that they exchange a kiss at the start of every Fed policy meeting.

"She would make a great chairperson. I think it was denigrating to her to watch this whole thing being debated in public ... It was denigrating to Larry Summers as well," Fisher said. "I hope the next time we go through this process it is done with more grace," he added.

(The story corrects name of bank association in fifth paragraph)

(Additional reporting by Mark Felsenthal; Additional writing by Alister Bull; Editing by James Dalgleish)

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