(Repeats to widen distribution)
By Lesley Wroughton and Glenn Somerville
WASHINGTON, March 19 (Reuters) - The global economy will shrink as much as 1 percent this year -- its first contraction since World War Two -- the International Monetary Fund warned on Thursday, urging quick action to deal with problem assets on banks' balance sheets.
In two reports prepared for a meeting of Group of 20 nations last week, the IMF said it was still forecasting a gradual economic recovery in 2010. But it zeroed in on the problem of the "toxic assets," saying the sooner they were dealt with, the better.
"Even in countries where banking sectors still appear resilient, the deepening global financial crisis is likely to imply greater stresses," the IMF said. It said G20 countries should also develop plans for coping with stricken financial institutions so they don't infect the broader economy.
Its expectations for economic performance are darkening. In January, the IMF projected the global economy would grow by 0.5 percent in 2009 rather than shrink, but it said those prospects were being worn down by the severity of the financial crisis.
A senior IMF official told a conference call with reporters there would be no enduring recovery until financial sector stability was restored and the world's leading economies increased their policy coordination.
The reports will flavor discussions on April 2 in London, when political chiefs, including U.S. President Barack Obama, join finance ministers from the G20 for another round of talks that will aim to bolster hopes that the recession's impact can be cushioned to some degree.
The IMF official said there were "considerable" downside risks to the forecast and the Fund may need to further cut its projections if the risks intensified.
For now, the IMF said advanced economies were in a severe recession that will shrink their GDP growth by a range of 3.0 percent to 3.5 percent in 2009, improving to around zero growth in 2010.
It said the United States economy would likely contract by 2.6 percent this year, while the euro area economy would decline by 3.2 percent in 2009.
Japan will likely suffer a 5.8 percent contraction in 2009 and will continue to shrink in 2010 by 0.2 percent.
It said major central banks should communicate their intentions to keep rates low until a recovery firmly takes hold. While U.S. and Japanese central banks have cut rates to near zero, there was still room for the European Central Bank to lower rates further, the IMF added.
Policy rate reductions have, however, had little impact on financial conditions, the Fund said.
EMERGING MARKETS SLOWING
Meanwhile, emerging and developing economies are slowing abruptly and likely to see growth taper to between 1.5 percent and 2.5 percent in 2009, recovering slightly next year to between 3.5 percent and 4.5 percent, the IMF said.
"Capital account pressures are intensifying for many emerging economies, amidst a contraction in cross-border lending," the IMF said.
It said central and eastern European countries were being hardest hit by the crisis because of their large current account deficits and a sharp decline in capital inflows.
In Latin America, tight financial conditions and weaker external demand are a drag on growth, and in Asia, countries are being hurt by a drop in manufacturing exports.
Meanwhile, in Africa and the Middle East, growth was slowing more modestly compared to other regions, it added.
Asked where the global recovery will begin, a senior IMF official said: "It will be different around the world."
In China, the official said, there were already signs that domestic activity was firming, but elsewhere in emerging market economies, a sustained recovery will depend on the performances of advanced countries.
In the United States, the IMF urged the new administration to provide more details on exactly how it plans to deal with banks' toxic assets and undercapitalized or bankrupt banks.
The IMF also said countries with sufficient international currency reserves should help companies that are having difficulties in accessing foreign capital.
It said emerging economies should make contingency plans to address the growing risk of large-scale corporate failures. There is mounting concern that the situation for many large emerging market economies could worsen as maturing debt for banks and large corporations comes due and global credit strains make it difficult to access financing. (Reporting by Lesley Wroughton; Editing by Jan Paschal)