The International Monetary Fund has said Europe needs to "get its act together" and deal with its worsening debt crisis, warning of the risk of severe repercussions for global growth.
The IMF said both Europe's debt woes and a painfully slow US recovery could undermine global expansion, and it warned that without action those economies could tip back into recession.
The top economist at the global lender, however, singled out Europe as "a major source of worry" as he released the IMF's latest World Economic Outlook report.
"There is a wide perception that policymakers are one step behind markets," IMF chief economist Olivier Blanchard told reporters. "Europe must get its act together," he added.
The IMF lowered its forecasts for world growth this year, and repeated comments last week from its head Christine Lagarde, who said the global economy was entering a dangerous phase.
The IMF cut its forecast for world economic growth this year to 4%, from a previous 4.5% prediction. It also slashed forecasts for euro zone and US growth.
The report urged European government to quickly ratify the commitments agreed at their summit in July, which were aimed at easing the euro zone debt crisis. It also said the European Central Bank should continue to intervene "strongly" in keep order in sovereign debt markets, and also lower interest rates if growth continued to be weak.
The IMF also said weak European banks must be asked to raise more capital, either through private sources, or from governments or the euro zone's rescue fund.
European banks are "heavily exposed" to countries facing rising borrowing costs and lenders should make efforts to increase their capital following holes revealed by recent "stress tests" on the sector, the IMF said.
The fund said trouble in a few European countries could quickly spread across Europe, and then move to the US - because of US institutional investors' holdings of European assets - and to the rest of the world.
The IMF sharply lowered its growth projections for the euro zone to 1.6% this year and 1.1% in 2012, down from 2% and 1.7% respectively in a June forecast.
On the US, the IMF said deep political divisions had left the course of US policy "highly uncertain". It said the Federal Reserve should be ready to take further measures to boost growth.
The IMF also warned that the US economy could remain weak for years to come, as it slashed its growth forecast for this year by a full percentage point to 1.5%.
The fund left its forecast for Irish growth this year at 0.4%, the same figure given in its latest review of the economy earlier this month.
Give up some control, IMF urges euro countries
The IMF told euro zone countries they must be prepared to give up some sovereignty over economic and financial affairs as part of a drive to solve the euro area debt crisis.
The IMF said "countries must stand ready to sacrifice some policy autonomy for the common European good", and must push ahead with greater integration of economic and budgetary policies.
It said the overriding policy challenge, beyond containing the immediate crisis in the euro area, was to push forward with European integration. It said stronger European governance frameworks "are essential to aligning fiscal policies and limiting external imbalances".
It urged to the euro area to go further with developing the single market in financial services, adding that the financial sector urgently needed a "truly integrated financial stability framework, featuring a single rule book, integrated supervision and burden-sharing".
But it warned that increased sharing of risk - as seen in the July 21 euro area agreement - would need to be accompanied by increased sharing of responsibility for macro-economic and financial policies. Greater sharing of sovereignty over budgetary and economic affairs - notably over taxation and spending policies - are likely to require changes to the European treaties.
