The Fed chairman also repeated his view - first expressed in December 1996 - that improvements in productivity and profits have created a bubble in share prices.
"The danger is that ... an unwarranted, perhaps euphoric, extension of recent developments can drive equity prices to levels that are unsupportable," he said in the eagerly awaited twice-yearly Humphrey-Hawkins testimony to Congress.
Bond prices fell immediately and sharply, the yield on the benchmark 30 year Treasury bond climbing to 5.95 per cent. The futures markets reckoned there was now a 50-50 chance the Fed would raise interest rates next month.
The Dow Jones Industrial Average index was more than 76 points lower an hour after Mr Greenspan spoke, at 10,926.48. It has fallen sharply from 11,209.84 at the end of last week.
The technology-dominated Nasdaq index fared worse, losing 71.4, or 2.6 per cent, to reach 2,690.37 by late morning.
The dollar was also weaker against both the yen and euro, dropping to a one-month low below 117.5 against the Japanese currency.
"In the past, Greenspan has used the pre-emption word as a cast-iron signal that rates were about to go up. He has maybe left himself a little room for manoeuvre this time, but we will see them increase by October," said Ian Shepherdson, an analyst at High Frequency Economics.
In his prepared remarks, Mr Greenspan noted that 1.25 million new jobs had been created in the US in the first six months of this year. There was no sign yet of higher wage costs, and the Fed had tried to allow the economy to realise its full potential. But, he added: "It is imperative that we do not become complacent."
An acceleration in productivity gains had allowed the combination of slower inflation and rapid real growth. If the expansion lasts until January it will have lasted more than nine years to become the longest of the post-War era.
The Federal Reserve raised its key policy rate by a quarter point to 5 per cent last month, having cut it three times last autumn in response to the global financial crisis.