This file photo shows the logo of the International Monetary Fund (IMF) at the organization's headquarters in Washington DC. (AFP/File - Saul Loeb)
With risks to the world growth and financial systems rising from the contraction across much of Europe, the IMF called on governments not mired in fiscal emergencies to avoid overly chopping spending that could exacerbate the situation.
In an update of its September economic forecasts, the IMF cut its 2012 forecast to 3.3 percent, from the prior 4.0 percent estimate, and said the 17-nation eurozone would contract by 0.5 percent this year.
It said global growth could pick up to 3.9 percent in 2013, but only if market panic over eurozone fragility is avoided. If markets grow more skittish, that could force up interest rates for even more governments and force them to cut spending.
"The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere," the global crisis lender said.
"Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated."
The lowered forecast "is largely because the euro-area economy is now expected to go into a mild recession in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation," it said.
"Growth in emerging and developing economies is also expected to slow because of the worsening external environment and a weakening of internal demand," it added.
The Fund has been warning for weeks that global growth was weakening due to the European crisis.
On Monday in Berlin, IMF managing director Christine Lagarde pressed European leaders to build a stronger backstop to prevent the problems in the continent's weakest economies - Greece, Spain and Portugal - from pulling down others.
"We need a larger firewall," she said. "Without it, countries like Italy and Spain that are fundamentally able to repay their debts could be forced into a solvency crisis by abnormal financing costs."
In the new forecast, the Fund warned against overly sharp budget-balancing by those countries that can afford to move slowly to reduce their deficits.
Otherwise, they will just create more drag on the global economy.
Countries "with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation," it said.
The recommendation was pointed at Europe's largest economies Germany, France and Britain, all of which it said would continue to grow this year, albeit at a weak pace.
Germany's economy was seen growing 0.3 percent, France's 0.2 percent, and Britain's 0.6 percent.
The United States, the world's largest economy, was projected to grow 1.8 percent in 2012.