(WASHINGTON) - Europe is being hit by "extraordinary financial stress" that is pushing several countries into or close to recession, the IMF warned Wednesday as it slashed growth forecasts for the region.

The IMF said the world is entering a serious downturn "in the face of the most dangerous shock" in financial markets since the 1930s Great Depression.

"Western Europe is being hit by major shocks that are weakening economic activity, notably extraordinary financial stress," the International Monetary Fund said in its biannual report on the world economy.

Growth had already slowed in the first quarter, especially in Britain and the Nordic states, and recent indicators "suggest that many countries are moving close to or into recession."

For the 15-nation Eurozone, growth will slow sharply to 1.3 percent this year from 2.6 percent in 2008 and fall further to just 0.2 percent in 2009.

In July, the IMF had put Eurozone growth at 1.7 percent and 1.2 percent for this year and next.

Britain will grow 1.0 percent this year and contract 0.1 percent in 2009 -- compared with earlier estimates of 1.8 percent and 1.7 percent.

The IMF said high commodity prices, led by oil, caused the initial slowdown but the financial turmoil -- which took another twist downwards on Wednesday as markets collapsed around the world -- was now increasingly to blame.

"European banks are struggling with a confluence of adverse shocks," chief among them the US subprime or higher risk home loan crisis, it said.

As those home loans turned sour last year, banks suffered growing losses and became increasingly reluctant to lend money, sparking a credit squeeze which undercuts business and makes the downward spiral even worse.

The process of deleveraging or undoing the chain of bad debt so as to get the banks lending again will "likely be long and arduous ... (and) will weigh noticeably on economic growth over the coming quarters," the IMF warned.

Among the downside risks to the growth forecasts, the IMF listed "accelerated deleveraging in the financial sector set off by broader asset price deflation and a global credit crunch, an abrupt unwinding of global imbalances, and sharp appreciation of the euro."

Countries such as Ireland, Spain and Britain which saw the greatest bubble in house prices may face the most difficulties, with high levels of household debt adding to the problem.

The IMF noted central bank efforts around the world to get liquidity flowing again "in this challenging environment" but said that "even if a comprehensive approach to address the growing concerns is put in place rapidly, it will take time to return perceptions of counterparty risk to more normal levels."

As the crisis has unfolded, first in the United States and now in Europe, governments have been forced to take increasingly drastic action in an effort to stabilise their crumbling banks.

Last week, the US Congress passed a 700 billion dollar bank bailout plan and on Wednesday Britain became the latest to announce a massive package which partly nationalised the country's banking system.

The IMF noted that despite the financial upheaval, there had been little change overall in European interest rates and that should now change.

"The immediate priority for central banks is to maintain calm in financial markets by continuing to provide liquidity as needed.

"However, the deteriorating outlook, moderating inflation pressure, and tightening financial conditions provide scope for monetary easing in both the euro area and the United Kingdom," it said.

The US, British and European central banks, followed by many others took joint action Wednesday to cut interest rates, mostly by half a percentage point, in an effort to stem the financial crisis sweeping the world.

The action had an immediate positive impact on slumping stock markets, many of which recovered some lost ground.

The IMF also pressed for coordinated responses, noting that "the continuing financial turmoil presents important policy challenges on various fronts, including because of complex cross-border financial linkages and spillovers.

"The latter is a particular concern for EU countries, given their quest to build a single market in financial services."

Ireland last week announced a blanket deposit guarantee for its six major banks, sparking complaints from its EU partners that the move put their banks at a competitive disadvantage.

On Tuesday, EU finance ministers in response agreed to increase bank deposit guarantees to 50,000 euros (67,500 dollars) from 20,000 euros although several member states went further and hiked the level to 100,000 euros.

"Restoring confidence now requires a decisive commitment to concerted and coordinated action to alleviate financial stresses and avoid the serious risk of backtracking on European financial integration," the IMF said.

International Monetary Fund (IMF) homepage

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