Financial products should be treated like medicines and sold to consumers only when they are certified safe to prevent a repeat of last year's financial meltdown, the world's central bankers said on Monday.

The Bank for International Settlements (BIS), which acts as a forum for central banks, said government efforts to revive the global economy might have only a temporary impact because banks are not being pushed hard enough to fix their underlying problems.

Banks' lending and other practices, including the approval of risky mortgages in the United States, led the global economy into the worst recession in decades. Governments have poured trillions of dollars into rescuing the financial system and easing a recession that has cut through company workforces.

A rise in Japanese industrial output and a pick-up in euro zone economic confidence showed the unprecedented government spending is having an effect.

But policymakers said it was too early to conclude a recovery was taking root and officials in the United States, Europe and China said the need for further stimulus measures should not be ruled out.

I think that we are not out of the woods yet, said Guillermo Ortiz, Mexico's central bank governor and the BIS board chairman. One important question is whether these green shoots actually take root.

Global recovery hopes have pushed world stocks more than 20 percent higher in the second quarter. But the rally has stalled recently on worries that markets may have been too aggressive in their bets on the strength and timing of the nascent upturn.

The MSCI world equity index was flat at 1015 GMT (6:15 a.m. EDT). Tokyo shares fell 1 percent, but European stocks pushed 0.7 percent higher.

RISK OF PROTRACTED STAGNATION

The BIS was alarmed by how a collapse in the value of opaque and complex securitised products propelled the world's financial system into crisis. It said in its annual report all financial products should be registered like medicines.

The safest instruments would be available to everyone, a second tier only to people with authorization, like prescription drugs, and a third tier to a limited number of pre-screened individuals and institutions, like experimental drugs are.

A final tier would be securities deemed illegal.

Such a registration and certification system creates transparency and enhances safety ... This will mean that issuers bear increased responsibility for the risk assessment of their products, the BIS said.

The BIS also said that while governments have moved quickly to support their economies, they have not done enough to remove problem assets from banks' balance sheets.

A significant risk is therefore that the current stimulus will lead only to a temporary pickup in growth, followed by protracted stagnation, it said.

RECOVERY SIGNS

Japanese industrial output rose 5.9 percent in May and manufacturers forecast further, albeit smaller, increases in the next two months. That improvement is set to be reflected in the Bank of Japan's quarterly tankan survey on Wednesday.

The euro zone's economic sentiment index rose for the third month in a row to 73.3 in June, a European Commission survey showed, topping a Reuters poll forecast of 70.8.

But the signs are not conclusive and recovery is fragile.

Japanese industrial output is still nearly a third below year-ago levels while euro zone economic confidence is below the lows of the last big recession in the early 1990s.

Policymakers are concerned the nascent revival could fizzle out and said they stand ready to take more action if needed.

Right now we believe what we have done is adequate to the task. If more is needed, we'll have that discussion, top White House adviser David Axelrod said on Sunday.

European Union economic chief Joaquin Almunia said Europe faced quarters of negative growth and further stimulus measures should not be ruled out, while a senior Chinese government economic said the country had scope to increase spending if needed.

Some economists say, however, more spending will damage already fragile government finances and could stoke inflation.

The International Monetary Fund said France, the euro zone's second-biggest economy, faced uncomfortably high fiscal deficits while a Chinese government think-tank official said there were early signs of asset price bubbles.

Later on Monday, the sentencing of Bernard Madoff will serve as a reminder of market excess and oversight flaws that led to the worst economic downturn since the Great Depression. Madoff, 71, is accused of masterminding Wall Street's biggest investment fraud and faces an effective life term in prison.

(Writing by Mark Potter in London; Editing by Robert Woodward)

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