The euro zone debt crisis is escalating and dragging down the world economy, the International Monetary Fund said on Tuesday, as it sharply cut its outlook for global growth and called for policies to restore confidence.

The IMF chopped its 2012 forecast for global growth to 3.3 percent from 4 percent just three months ago, saying the outlook had deteriorated in most regions. It projected world growth would strengthen to 3.9 percent in 2013.

The Washington-based lender said economic activity was decelerating but not collapsing. However, it warned that global growth would come in about 2 percentage points below its already soft forecast if European leaders allowed the crisis to fester.

For the first time since the debt turmoil erupted two years ago, the IMF said the 17-nation euro zone would likely slip into a mild recession in 2012, with output contracting by about 0.5 percent.

The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere, the IMF said in its latest World Economic Outlook report.

The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation, it added.

The IMF maintained its 1.8 percent growth forecast for the United States in 2012, but cut its projection for Japan to 1.7 percent from 2.3 percent in September.

It said economic activity in advanced economies would expand by 1.5 percent on average in 2012 and 2013, too sluggish to make a major dent in high unemployment rates.

SUPPORT FOR GROWTH NEEDED

The IMF said the United States and other advanced economies would likely not escape unharmed if Europe's crisis escalated further.

Talks between private bond holders and the Greek government have foundered, raising the risk Athens could face a messy default that would touch off a deeper crisis. IMF Managing Director Christine Lagarde has called on Europe to bolster its rescue funds to erect a wall against financial contagion.

The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro zone crisis, and have homegrown challenges ... including overcoming political obstacles, the IMF said.

The fund projected a sharp slowdown in the pace of growth in emerging and developing countries and urged them to focus policies to stimulate their economies.

It now projects growth in emerging economies to reach 5.4 percent in 2012, down from the 6.1 percent it forecast in September. It cut China's growth figure to 8.2 percent for 2012, down from 9.0 percent. Chinese growth should rebound to 8.8 percent in 2013, it added.

For fast-growing emerging Asia as a whole, the IMF reduced its growth outlook for 2012 to 7.3 percent from 8 percent.

Elsewhere, the IMF said growth in the Middle East and North Africa should accelerate, driven mainly by a recovery in Libya after a nine-month civil war ended with the capture and killing of leader Muammar Gaddafi in October.

The IMF said global oil prices would likely only ease slightly in 2012 despite slowing world growth. The Fund said its baseline oil price projection was broadly unchanged since September when it forecast $100 a barrel.

Non-oil commodity prices are set to fall by 14 percent this year, the IMF said, adding that risks to prices are to the downside for most commodities.

In Africa, the global slowdown is likely to be limited to South Africa, with the region as a whole expanding by around 5.5 percent this year.

The largest impact of the slowdown would likely be felt in central and eastern Europe, which has strong trade links with the euro zone economies, the IMF said. It revised down its estimate for the region to 1.1 percent in 2012 from a previous forecast of 2.7 percent. Growth should edged up to 2.4 percent next year, the IMF added.

(Editing by Neil Stempleman and Tim Ahmann)

Japan China South Africa Libya