The International Monetary Fund revised its 1998 world economic growth forecast down sharply to 2.0 per cent yesterday and said even this could be overly optimistic.

The IMF's World Economic Outlook, a survey of risks and opportunities in the IMF's 182 member countries, said the world economy would grow 2.0 per cent in 1998 and 2.5 per cent in 1999, down from 3.1 per cent and 3.7 per cent forecast six months ago.

But the IMF's unusually gloomy report made clear the fund doubted its own forecasts and it said several countries faced big downside risks. Japan needed promptly to reform its ailing banking system, Asia's troubled economies had to stick to IMF recipes and Russia needed a deal with disgruntled creditors.

"A significantly worse outcome is clearly possible," the IMF said. "The potential for a broader and deeper economic downturn stems from a multitude of inter-related risks that make the current economic situation unusually fragile."

The IMF said risks included the possibility that banks would pull out of emerging markets for a prolonged period, threats to international payments systems and lower stock prices "with attendant loss of financial wealth and contraction of consumption and investment worldwide".

It forecast 1998 growth of 3.5 per cent in the United States, slowing to 2.0 per cent next year - a soft landing rather than a recession.

The report, written before the US Federal Reserve cut interest rates on Tuesday, said both the United States and Europe should consider lowering interest rates.

Japan, set for a 2.5 per cent decline in output this year and a slim 0.5 per cent recovery next year, needed to act urgently to restore market confidence and rebuild its damaged banking sector, the IMF said.

"It is critical that Japan takes decisive action to resolve banking problems and ensure a self-sustaining recovery."

The IMF had earlier forecast zero growth for Japan in 1998, rising to 1.3 per cent in 1999.

The IMF, which put together multi-billion dollar rescue deals for Thailand, Indonesia and South Korea last year, said Thailand and South Korea could return to growth next year, after steep declines in output in 1998.

Russia had replaced Asia as "the epicentre of global financial market pressures" and Russian output would decline 6 per cent in 1998 and 1999, the fund added.

The IMF previously expected 1 pr cent growth in Russia in 1998, up slightly from 0.9 per cent in 1997 and it had earlier said Russian output should rise to 1.9 per cent next year.

The IMF revised its 1998 growth forecast for the European Union up marginally to 2.9 per cent, from 2.8 per cent, including 3.0 per cent for the 11 countries set to introduce a single currency. EU output would be 2.5 per cent in 1999, but 2.8 per cent in the euro currency zone.

The IMF said European policy should stress the need to boost domestic demand, using interest rates for this if needed.