WASHINGTON (Bloomberg) — The International Monetary Fund cut its forecast for global growth this year and said there's a 25-percent chance of a world recession, citing the worst financial crisis in the US since the Great Depression.

The world economy will expand 3.7 percent in 2008, the slowest pace since 2002, according to a document obtained by Bloomberg News at a meeting of Southeast Asian finance officials in Da Nang, Vietnam. In January the fund projected growth of 4.1 percent.

The reduction is the third by the Washington-based lender since last July, when it predicted the world economy would cope with the US credit squeeze and grow 5.2 percent this year. Central banks will need to conduct policy "as flexibly" as the circumstances warrant, the statement said, adding that the European Central Bank has room to lower borrowing costs.

"The financial shock that originated in the US sub-prime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system," the statement said. "The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression."

Asked in an interview about the IMF's analysis, US Treasury Secretary Henry Paulson said yesterday "that sounds overblown to me".

The world's biggest financial companies have reported about $232 billion in credit losses and writedowns since the start of 2007, data compiled by Bloomberg show. UBS AG said yesterday it will have $19 billion more write-downs on assets related to mortgage assets.

"The world economy is slowing quite considerably and will be very different from what we've become accustomed to," said Andy Cates, an economist at UBS in London.

The IMF gave a 25-percent chance that global growth will drop to three percent or less in 2008 and 2009, a pace the fund described as equivalent to a world recession. The last time that happened was in 2001.

The fund lowered its forecast for US economic growth to 0.5 percent this year, below a 1.5 percent prediction made in January. The world's biggest economy will expand 0.6 percent in 2009, it said.

The euro region will expand 1.3 percent in 2008, the document said, down from the fund's 1.6 percent projection in January.

"Growth in the US and Europe is slowing sharply," the IMF document said. "The ECB can now afford some easing of the policy stance."

The ECB has left its benchmark rate at a six-year high of 4 percent as inflation runs at 3.5 percent, above its goal of two percent and almost the fastest pace in 16 years.

Japan's economy, the world's second largest, will grow 1.4 percent in 2008, less than the 1.5 percent the IMF predicted in January, according to the statement. China will grow 9.3 percent this year, slower than the 10 percent projection made in January, the statement said.