Finance chiefs from the G7 powers said on Friday the global economy may be past the worst phase of a recession although recovery was not yet assured, and they pledged to make sure that big financial firms are sound.

Group of Seven finance ministers and central bankers said after a meeting that economic activity should begin to recover later this year. However, they said the outlook remained weak and there was a risk that the global economy may still worsen.

We are right to be somewhat encouraged, but we would be wrong to conclude that we are close to emerging from the darkness that descended on the global economy early last fall, U.S. Treasury Secretary Timothy Geithner said in a statement.

It was a less dire assessment than the G7 finance officials delivered at their last gathering in February, when they warned that the severe downturn would persist through most of 2009 and made no mention of promising signs of stability.

Recent data suggest that the pace of decline in our economies has slowed and some signs of stabilization are emerging, the G7 said in a closing communique.

We will continue to act, as needed, to restore lending, provide liquidity support, inject capital into financial institutions, protect savings and deposits and address impaired assets. We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions, the statement said.

Japanese Finance Minister Kaoru Yosano said signs of stabilization was an expression with a question mark.

But we understand that the G7 statement has indirectly expressed the view that the worst may be possibly over for the world economy, he added.

The G7, which comprises the United States, Britain, Canada, France, Germany, Italy and Japan, met a day before the International Monetary Fund and World Bank begin their twice-yearly meetings. The larger G20 group, which includes emerging economies such as China and India, held a meeting after the G7 but issued no official statement.

Geithner said both groups had the same agenda.

The agenda will be: What are we doing? Are we doing enough to help attenuate the risks in this recession, lay the foundation for an earlier recovery, lay the foundation for a more balanced, more sustainable recovery? he said.

FIX THE BANKS

The G7 has been under growing pressure to speed up efforts to rid banks of bad assets that have constrained lending and plunged the global economy into its deepest recession since World War Two.

The International Monetary Fund, which has estimated that losses at financial institutions around the globe could exceed $4 trillion, urged rich nations to prioritize repairing the financial sector because the world economy cannot fully recover unless credit is flowing.

The IMF is absolutely right when it asks countries to deal with toxic assets because transparency is crucial for recovery, said Mario Draghi, head of the Financial Stability Board, a newly fortified group designed to coordinate global regulatory reform.

But some European officials questioned how the IMF calculated the magnitude of bank losses. The Fund estimated that European banks may need to write down $750 billion in bad assets, while U.S. firms had $550 billion more to go.

We are looking at it very carefully and we think there are methodological issues we have to clarify with the IMF, European Central Bank President Jean-Claude Trichet told a news conference after the G20 meeting. I am not criticizing the IMF (but) we have to look at it very carefully.

U.S. regulators have put 19 of the largest U.S. banks through stress tests to assess whether the government will have to pump more money into them. Geithner said the results of the stress tests were not discussed at the G7 meeting.

The Federal Reserve released a paper on Friday outlining the methodology of the tests, and said banks needed to hold substantially more capital than is usually required to weather a potential worsening of the recession.

Canadian Finance Minister Jim Flaherty, who has expressed frustration over the slow pace of progress in fixing the banks, said after the G7 meeting that he was pleased with U.S. and British efforts to implement their bank repair plans.

We're going in the right direction, he said.

With attention firmly focused on the banking sector, the G7 made no changes to its closely watched statement on currency markets, repeating its February caution that excess volatility and disorderly movements in exchange rates were unwelcome.

(Reporting by G7 team; Writing by Emily Kaiser and Glenn Somerville; Editing by Chizu Nomiyama)

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