Washington - The world's banks need deeper government intervention and better cooperation to halt a deepening global recession and avoid a collapse of major 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 global decline since World War II.

The IIF, in a letter to world leaders meeting in London next month, called on governments to pump even more money into their fledgling economies, 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," IIF managing director Charles Dallara said amid signs of a growing rift between the United States and Europe over how aggressively to tackle the economic crisis.

Dallara said he could understand both sides, but warned that the already "fragile" state of global stock markets - which have shown some signs of life over the past few days - could be eroded if their was no clear agreement at the April summit of the Group of 20 (G20) leading economies.

"Clearly we would encourage countries which have fiscal strength to do their utmost in the near term," Dallara said, but added that some countries had less room in their budget for stimulus than others.

Dallara said the only means of rescuing the financial industry 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.

Financial firms have lost more than 1 trillion dollars in risky investments related to the collapse of the US housing market and have cut back sharply on lending to consumers as a result.

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's 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 Washington-based IIF is an association of some 375 financial institutions around the world. (dpa)