"The overall balance of risks to the short-term global growth outlook remains tilted to the downside," said the report, noting the IMF staff now sees a 25 percent chance that global growth will drop to 3 percent or less in 2008 and 2009 -- equivalent to a global recession.

The greatest risk comes from the still-unfolding events in financial markets, particularly the potential for deep losses on structured credits related to the U.S. subprime mortgage market and other sectors to seriously impair financial system balance sheets and cause the current credit squeeze to mutate into a full-blown credit crunch, said the report.

Interaction between negative financial shocks and domestic demand, particularly through the housing market, remains a concern for the United States and to a lesser degree for western Europe and other advanced economies, said the report.

Policymakers around the world are facing "a diverse and fast-moving set of challenges," and although each country's circumstances differ, in an increasingly multipolar world it will be essential to meet these challenges broadly, taking full account of cross-border interactions, the IMF warned in the report, which published twice a year.

In the advanced economies, the pressing tasks are dealing with financial market dislocations and responding to downside risks to growth -- but policy choices should also take into account inflation risks and longer-term concerns, said the report.

Meanwhile, many emerging and developing economies still face the challenge of ensuring that strong current growth does not drive a buildup in inflation or vulnerabilities, but they should be ready to respond to slowing growth and more difficult financing conditions if the external environment deteriorates sharply, the report noted.

China's growth would continue its fast expansion in 2008 and 2009 from its very high rate in 2006. It is expected to increase 9.3 percent in 2008 and 9.5 percent in 2009.

India is expected to expand 7.9 percent this year and 8.0 percent next year. Russia would continue to grow robustly at 6.8 percent this year and moderate to 6.3 percent next year.

The Washington-based agency also warned policymakers should cooperate to deal with the challenges, stressing "broadly based efforts to deal with global challenges have become indispensable."

"Providing fiscal stimulus across a broad group of countries that would benefit from stronger aggregate demand could prove much more effective than isolated efforts, given the inevitable cross-border leakages from added spending in open economies," said the analytical report.

"It is still early to launch such an approach, but it would be prudent for countries to start contingency planning to ensure a timely response in the event that such support becomes necessary," the report added.

(Xinhua News Agency April 10, 2008)