IMF should become a formal `lender of last resort,' stepping in to rescue cash-starved nations in much the same way the federal reserve board acts to preserve the health of the US banking system, the Wall Street Journal quoting Fischer said here yesterday.

Fischer told the American economic association and American finance association at a joint gathering in New York, ``international capital flows are not only extremely volatile, but also contagious, exhibiting the classic signs of financial panics.

``An international lender of last resort (like the IMF) can help mitigate the effects of this instability and, perhaps, the instability itself,'' he said.

He pointed out that IMF already `acts in important respects as international lender of last resort.' But, he said, ``the job can surelybe done better.''

He pointed out that while central banks act as financial backstops for their domestic banks, there is no true international equivalent.

The IMF, with 182- member nations, in the last 18 months has led big-money international rescue efforts for Thailand, South Korea, Indonesia, Russia and Brazil, Fischer said.

The IMF, he said, should go further, pre-qualifying countries for aid during good times, so that the agency could provide loans quickly if their economies soured. Those loans would be especially helpful to otherwise-prudent countries beset by financial panic.

However, Fischer implied, said the journal, that the IMF must step in, like the FED with US banks, even if countries do not always adopt prudent economic policies.

The risk, however, he said, is that governments won't act responsibly, banks won't lend responsibly, and investors won't invest responsibly if they know that the IMF will bail them out.

To alleviate that danger, he said, the IMF should charge higher interestfor loans to countries that do not adopt sound policies.

Commenting on Fischer's proposals, a senior US treasury official cautioned, ``it is important to recall that an international institution can never exercise the same kind of leverage over countries that national central banks exercise over domestic banks.''