The International Monetary Fund (IMF) yesterday urged the European Central Bank not to rule out further cuts in interest rates, arguing that the euro zone economy could remain weak despite the unexpectedly big reduction in rates two weeks ago.

The IMF's warning will be welcomed by the US Treasury and European governments ahead of Monday's meeting of finance ministers and central bank governors from the Group of Seven leading industrial economies.

The IMF believes that, with a slowdown in the US economy likely and desirable, a strong performance in the euro-zone is vital to keep the world economy on track.

But "we have yet to see the basis" for the forecast recovery of EU growth to 3 per cent next year, IMF chief economist, Mr Michael Mussa said. In its latest World Economic Outlook, the IMF reiterated its December forecast that the global economy would expand by 2.3 per cent this year, down slightly on last year and barely half the rate recorded in 1997.

The fund has revised its growth forecast up for the US and down for Europe and Latin America.

Indeed, the United States is the only major industrial country, apart from Canada, whose growth has been revised upwards, leaving it the chief engine of growth in the Group of Seven this year, although that role is seen being taken over by France and Germany in 2000.

The expansion in world output is then expected to rebound to 3.4 per cent next year.

"The balance of risks remains on the downside, however, and several hurdles could prevent global growth from returning to potential within two or three years," the IMF warned.

The outlook for Japan remains uncertain.

The IMF report highlighted the danger of further financial market turbulence and contagion because of heightened perception of, and aversion to, risk in financial markets. Policymakers should focus on policies required to sustain growth if the global economy was not to sink further in its fourth economic slowdown in 25 years, the report said.