Abstract: A fluidized bed combustion system and method in which a recycle heat exchange section is located within an enclosure housing the furnace section of the combustion system. The flue gases and entrained solids from a fluidized bed in the furnace section are separated and the flue gases are passed to a heat recovery section and the separated particulate material to the heat exchange section. The heat exchange section includes a bypass chamber for permitting the separated solids to pass directly from the separator, via an outlet chamber, to the furnace section. A heat exchange chamber is provided in the recycle heat exchange section which receives the separated materials from the bypass chamber and transfers heat from the separated material to a fluid flow circuit for heating the fluid flow circuit and reducing the temperature of the separated material. The separated material in the heat exchange chamber is then passed back, via the outlet chamber, to the furnace section.