WASHINGTON - The global economy will contract in 2009 by more than initially thought, given rising unemployment and underutilization of capacity, World Bank President Robert Zoellick said on Thursday.

Speaking before a weekend meeting in Italy of finance ministers from the Group of Eight major industrial nations, Zoellick said indications were that the world economy would shrink by close to 3 percent, worse than the previous estimate of 1.75 percent.

Zoellick's remarks came as a G8 source told Reuters that the International Monetary Fund had raised its 2010 global growth estimate to 2.4 percent from 1.9 percent and confirmed its 2009 forecast for a 1.3 percent contraction.

There was no comment from the IMF, which will release its World Economic Outlook update on July 7.

I personally believe you might be able to see some aspects of recovery in 2009 and 2010, but from a policy point of view, that isn't the core question because we have a large degree of uncertainty, Zoellick told reporters.

He said while developed economies have previously recovered rapidly from downturns, there were concerns that the process this time around would be slow because of very low capacity utilization and questions about sources of demand.

The global recession, which has its roots in the collapse of the U.S. housing market, has been marked by a surge in unemployment as companies respond aggressively to the slump in demand.

Even with growth expected to return in 2010, Zoellick said most developing countries would continue to be buffeted by the aftershocks and faced increasingly bleak prospects unless the slump in their exports, remittances and foreign direct investment was reversed by the end of 2010.

There is much more we need to do in the coming months to mobilize resources to ensure that the poor do not pay for a crisis that is not of their making, said Zoellick. There is a big price to pay if you don't support these countries.

He said he would push for continued support for poor countries at the G-8 summit. Warning of a potential increase in defaults, Zoellick said the World Bank estimated the overall financing gap for developing countries will be between $350 billion and $635 billion in 2009.

Low-income countries that have limited borrowing capacity due to low reserves and drained national budgets will face particular difficulties in getting sufficient finance in the next few years, Zoellick said.

Because of this, lending from the World Bank, the IMF and other sources will become increasingly important as the crisis rolls across low-income countries.

Zoellick said the World Bank's International Development Association, which focuses on 78 of the poorest countries, had seen a flood of requests for assistance, adding that he would urge countries to honor their pledges to the fund.

IDA grants and interest-free loans are expected to exceed $13 billion, a record, for the fiscal year ending June 2009. This compares to $11.2 billion the previous period.

Zoellick said demand had also increased at the International Bank for Reconstruction and Development, which is part of the World Bank group that supports creditworthy low- and middle-income countries.

Loan volumes were expected to rise to a record $33 billion this fiscal year from $13.2 billion last year.

(Editing by James Dalgleish)

United nations International Monetary Fund