Washington - The world's banks need more government intervention and better cooperation to halt a deepening recession and shore up struggling financial institutions, the global financial lobby said Friday.

The International Institute of Finance (IIF) said the world's economy will shrink by 1.8 per cent this year - down from its January prediction of a 1.1 per cent contraction that would mark the first since World War II.

Charles Dallara, managing director of the IIF, called on the world's leaders meeting in London next month to avoid protectionist moves, double their funding of international financial institutions and nail down a common plan to rescue a financial industry that has yet to be stabilized.

"I think it's so important that they find common ground," Dallara said amid signs of a growing rift between the United States and Europe over how aggressively to tackle the economic crisis.

Dallara said the only means of rescuing financial firms was for the US government to take all of the trillions of dollars in damaged mortgage-related assets off of banks balance sheets.

Governments around the world have already plugged hundreds of billions of dollars into the industry to keep their banks from going under, as financial institutions have lost more than 1 trillion dollars in risky investments related to the collapse of the US housing market.

The US approved a 700-billion-dollar financial rescue package in October - a publicly unpopular effort - and legislators have been loathe to do any more for an industry that is blamed for causing the wider economic crisis.

Dallara insisted the industry was correcting its past mistakes. He rejected President Barack Obama's idea of the government joining with private investors to help take the troubled mortgage assets from banks.

Government must remove the assets first, Dallara said, noting that the "hesitation" over the initial cost "fails to recognize that the real long-term costs to the economy of inaction may well be much greater."

The IIF is made up of 375 financial institutions around the world. (dpa)