Washington - Europe is edging toward recession and its banking system faces "extraordinary financial stress" that will not ease quickly, the International Monetary Fund said Wednesday.

Economic growth in the 15 countries using the euro will slump from an average 1.3 per cent this year to 0.2 per cent in 2009, while unemployment will rise to 8.3 per cent from 7.6 per cent, an IMF report said.

Germany, Europe's largest economy, will stall in 2009; France will grow by 0.2 per cent; and Italy and Spain will see their economies shrink by 0.2 per cent, IMF analysts predicted in the semi-annual World Economic Outlook.

With European nations "moving close to or into recession," the IMF urged forceful action by policymakers to combat the crisis, including lower interest rates, and safeguard progress on Europe's financial integration.

Hours before the report's release, the European Central Bank and the US Federal Reserve led key central banks in a coordinated emergency cut in benchmark rates by 0.5 percentage points.

The ECB, which sets monetary policy for the 15 nations using the euro, gave up resistance to lower borrowing costs and slashed its main rate to 3.75 per cent. The Fed cut its key rate to 1.5 per cent.

Fallout from the US real-estate slump now has Western Europe facing "extraordinary financial stress," and unwinding European banks' exposure "will likely be long and arduous," the IMF said.

EU governments should move "toward more joint responsibility and accountability for financial stability," the Washington-based lender and aid agency said.

"Restoring confidence now requires a decisive commitment to concerted and coordinated action to alleviate financial stresses and avoid the serious risk of backtracking on European financial integration," IMF analysts said.

EU finance ministers, scrambling to react to the spillover, agreed Tuesday to more than double the public guarantee for private bank deposits to at least 50,000 euros (68,000 dollars).

Earlier, Chancellor Angela Merkel surprised Germany's EU partners with a unilateral initiative to boost protection for her country's savers.

Eyeing the rash of publicly funded bail-outs of troubled financial companies, the IMF urged European policymakers to make prudent choices.

Eurozone governments, whose deficit spending is limited by rules meant to protect the euro's value, should focus emergency injections "on measures to stabilize the financial sector, as needed," the report said.

On a brighter note, the IMF said falling real-estate prices in Europe are less likely to set off a major housing-related credit crunch than in the United States.

Higher savings rates, lower debt, more prudent mortgage lending and much more limited opportunities for equity withdrawal on real estate work in Europe's favour, the report said.

Still, the downturn in residential real estate will have "an appreciable short-term impact" in countries like Ireland, Spain and Britain. Austria, Germany and Switzerland appear the least at risk, the IMF said. (dpa)