Washington: The Eurozone debt crisis is escalating and dragging down the world economy, the International Monetary Fund said yesterday, as it sharply cut its outlook for global growth and called for policies to restore confidence.

The IMF chopped its 2012 forecast for global growth to 3.3 per cent from 4 per cent just three months ago, saying the outlook had deteriorated in most regions. It projected world growth would strengthen to 3.9 per cent in 2013.

The Washington-based lender said economic activity was decelerating but not collapsing. However, it warned that global growth would come in about 2 percentage points below its already soft forecast if European leaders allowed the crisis to fester. For the first time since the debt turmoil erupted two years ago, the IMF said the 17-nation Eurozone would likely slip into a mild recession in 2012, with output contracting by about 0.5 per cent.

"The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere," the IMF said in its latest World Economic Outlook report.

"The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation," it added.

The IMF maintained its 1.8 per cent growth forecast for the US in 2012, but cut its projection for Japan to 1.7 per cent from 2.3 per cent in September.

It said economic activity in advanced economies would expand by 1.5 per cent on average in 2012 and 2013, too sluggish to make a major dent in high unemployment rates.

Contagion feared

The IMF said the United States and other advanced economies would likely not escape unharmed if Europe's crisis escalated further.

"The US and other advanced economies are susceptible to spillovers from a potential intensification of the Eurozone crisis, and have homegrown challenges ... including overcoming political obstacles," the IMF said. The fund projected a sharp slowdown in the pace of growth in emerging and developing countries and urged them to focus policies to stimulate their economies.

It now projects growth in emerging economies to reach 5.4 per cent in 2012, down from the 6.1 per cent it forecast in September. It cut China's growth figure to 8.2 per cent for 2012, down from 9.0 per cent. Chinese growth should rebound to 8.8 per cent in 2013, it added.

Elsewhere, the IMF said growth in the Middle East and North Africa should accelerate, driven mainly by a recovery in Libya after a nine-month civil war ended with the capture and killing of leader Muammar Gaddafi in October.

The IMF said global oil prices would likely only ease slightly in 2012 despite slowing world growth. The Fund said its baseline oil price projection was broadly unchanged since September when it forecast $100 a barrel.