The International Monetary Fund on Wednesday forecast that the US economy would slip into a 'mild recession' this year and warned that there was a chance that the global economy could follow suit.
However, the IMF said emerging and developing economies would maintain robust growth rates, diverging from the rest of the global economy.
"The global expansion is losing speed in the face of a major financial crisis," the fund said in its latest World Economic Outlook report.
IMF officials have publicly expressed growing alarm about how the credit crunch which began in the US and appears to be infecting financial systems around the globe.
Dominique Strauss-Kahn, IMF managing-director, told the Financial Times on Monday that government intervention at a global level was required to tackle the credit crisis.
In the event of a severe global downturn the fund said that fiscal policy could play "a useful stabilising role" across a broad range of countries by bolstering confidence and demand.
In economies with more developed mortgage markets, the IMF also said "monetary policymakers may need to respond more aggressively to developments in the housing sector".
Accordingly, it said house prices should be considered as "one of the key factors" when assessing the balance of risks to output and inflation.
The IMF said global growth would slow to only 3.7 per cent in 2008, much weaker than its previous forecast 4.2 per cent made in January. World economic output rose 5 per cent in 2006 and 4.9 per cent last year.
The fund expects little improvement in 2009 and said there was a 25 per cent chance that the world economy could fall into recession this year, defined here as growth of 3 per cent or less.
Citing financial market turmoil and the US housing slump the IMF predicted that the US would experience a 'mild recession' in 2008, from which it will recover only slightly in 2009.
The financial sector faces potential losses of nearly $1000bn as a result of the credit crisis, the IMF said on Tuesday, warning of further losses and writedowns on mortgages and other credit products.
The fund marked down its US growth forecast to 0.5 per cent, 1 percentage point less than it forecast in January, and down from a 2.2 per cent growth rate last year.
"The effect of the financial turmoil in the United States has been to lower the prospects of growth, but, somewhat paradoxically, it has also increased oil prices, metal prices, and of course food prices," Simon Johnson, IMF chief economist, said.
The IMF forecast European growth to remain sluggish in 2008 and 2009, with the eurozone economy expanding by only 1.4 per cent this year, compared with a rate of 2.6 per cent in 2007.
As a result the fund said the European Central Bank could "afford some easing" in interest rate policy because inflation is likely to fall back next year.
The IMF has also trimmed its forecasts for growth in the emerging economies of central and eastern Europe, although these are still expected to expand by 4.4 and 4.3 per cent this year and next.
Although economic activity is starting to slow across emerging and developing countries the IMF expects growth to remain well above trend.
It projected China and India-which grew at 11.4 per cent and 9.2 per cent in 2007, respectively-to grow at 9.3 per cent and 7.9 per cent rate in 2008.
"Other emerging and developing economies, including in Africa and Latin America, are also expected to maintain robust growth rates," the IMF said.
The IMF identified strong productivity gains, better terms of trade for commodity producers and stronger institutions and macroeconomic policy as the main drivers behind continued growth in emerging economies.
However, the fund warned that inflation was a 'serious concern' throughout the world and was rising more in emerging and developing economies, driven in part by much higher food and energy prices.