The IMF said the worst financial trauma since the Great Depression would exact a heavy economic toll as investors wrestle with a crisis of confidence and a credit crunch.

"The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s," the IMF said in its World Economic Outlook.

The assessment was written before a coordinated interest-rate cut of a half-per centage point on Wednesday by the US Federal Reserve, European Central Bank, Bank of England, Switzerland, Canada and Sweden.

China also joined the move with a more modest cut.

The IMF's new chief economist, Olivier Blanchard, said the coordinated drive was a step in the right direction, but more action may be needed as the world economy slows.

"Fifty basis points is not nothing," Blanchard told a news conference. But he said monetary policy was only part of the answer and further measures were needed to clear up clogged credit markets. "More is needed, in particular in Europe," he said.

In an interview, Blanchard said the rash of crises in recent weeks had convinced world policy-makers that it was time to work together to find a way out of the credit turmoil, which has raged for 14 months.

"Events focus the mind," Blanchard said. "What's absolutely essential to solve this financial crisis is the perception by the public and by the markets that there is a coherent plan."

WORKING TO AVERT DEPRESSION

In its twice-yearly World Economic Outlook, the IMF slashed its 2009 forecast for world growth to 3 per cent, which would be the slowest pace in seven years, from a July projection of 3.9 per cent, and warned that a recovery would be unusually slow.

It said growth this year would come in at 3.9 per cent, a touch below the 4.1 per cent it projected in July.

While the world economy was unusually frail, Blanchard said there was little chance of a global depression, provided leaders adopt policies to address market distress.

"If the right policies are in place, then the probability of a 'Great Depression' is extremely small," he said.

Blanchard said leaders in Europe were having "some difficulty" agreeing on how to deal with the crisis but the financial markets were forcing them to move quickly.

If they succeed, "the risk of a 'Great Depression' is nearly nil," he added.

CRISIS SPREADS; EMERGING ECONOMIES HIT

The IMF blamed lax economic and regulatory policies for the current woes, saying they probably allowed the global economy to "exceed its speed limit." At the same time, market flaws combined with policy shortcomings to allow stresses to build.

Now, the world is about to pay the price.

The IMF had believed developing economies could largely steer clear of any painful spillover from the credit mess, but no longer. In its latest report, the global economic watchdog warned emerging and developing economies are also slowing, in some cases to rates well below trend.

The immediate challenge for policy-makers is to stabilize credit markets, while nursing economies through the global downturn and keeping inflation under control, the fund said.

IMF Managing Director Dominique Strauss-Kahn said more coordinated steps would be warranted to remove distressed assets from banks' balance sheets and to protect depositors.

"This is the right course of action in the face of the deflationary impact of the major financial shock in mature markets and against a background of declining inflation pressures," Strauss-Kahn said in a statement.

World Bank President Robert Zoellick said China's participation in the action was part of a process in which it was becoming a constructive stakeholder in the world economy.

Zoellick this week said the Group of Seven industrial nations was not broad enough to deal with the magnitude of the crisis, and called for a broader grouping of countries that included China and other emerging economic powers.

But Zoellick also said coordinated action was needed to help vulnerable, poor countries that will be hit by a crisis that was not of their own making. He said the World Bank had identified about 30 of these countries who would need help.

"We will play a role, but we need the developed countries to also act in a coordinated way to support that," he added.

US SCREECHES TO HALT

Meanwhile, the IMF said the US economy was screeching to a halt and warned a recession was increasingly likely.

For all of next year, it projects US growth of just 0.1 per cent. The near-term course of the US economy, the IMF said, will largely depend on the effectiveness of recent government initiatives to combat the spreading credit crisis.

In Europe, the crisis has stalled growth, and interest-rate cuts and decisive government action to restore confidence to prevent a lasting slowdown are needed, the report said.

The fund said growth in the euro zone was set to slow to 1.3 per cent in 2008, easing to a scant 0.2 per cent in 2009.

Asian powers China and India will also experience slower growth due to weaker exports, but should continue to be supported by solid private consumption, it said.