(Reuters) - The U.S. Federal Reserve is keeping an eye on European banks struggling with the continent's debt crisis because of the turbulence in financialmarkets, one of the central bank's most influential policymakers said on Friday.

William Dudley, the president of the Federal Reserve Bank of New York, was responding to report this week in the Wall Street Journal that the bank is taking a closer look at the U.S. units of Europe's biggest banks, out of concern that a euro zone debt crisis could spill into the U.S. banking system.

"We're looking at our banks, European banks basically because of the turbulence that we've seen in the financial markets," Dudley told a gathering of New Jersey business leaders, adding that doing so was "normal, standard operating procedure" for the central bank.

"The reality is we monitor European banks and U.S. banks every day, so there's nothing to be particularly alarmed about that," Dudley said. "It's prudent for us to make sure that we understand what's going on."

Dudley said the "good news" is that banks are in a stronger position than they were several years ago.

"Capital levels are much higher, the quality of capital is much better, credit quality at the banks is improving, and the banks have huge liquidity buffers compared to what they had in 2008," he said.

"There is some stress in the system right now ... But we're in much, much better shape than we were back several years ago," he said.

(Reporting by Edith Honan)

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