Britain’s reliance on the financial sector as an engine for the economy has left it more exposed than most other leading economies to fallout from money market turmoil and the global credit squeeze, the World Economic Forum said today.

Challenges to global prospects this year from a slate of economic and political risks are the most severe the world has faced in a decade, with dangers from global financial upheavals the most immediate and acute threat, the Forum finds.

In a bleak analysis that raises fears over the serious risk that the credit squeeze could trigger a US recession, the WEF’s annual Global Risks report also emphasises that Britain may also bear the brunt of the growing repercussions.

“In Europe, the prominence of the UK’s financial sector makes it vulnerable,” it notes.

The wave of turmoil that has engulfed world credit markets since the US sub-prime home loans crisis began last summer has raised “fundamental questions over the vulnerabilities of the current model of financial markets”, the report’s authors conclude.

Although rapid market innovation, deregulation and increasingly complex financial instruments have may have made the system more resilient under normal conditions, the forum argues that not enough attention has been paid to the impact of serious stresses.

“Many would argue that the overall resilience of the global financial system will only become evident under conditions of severe stress over the next year,” it said. “The complexity and near-infinite feedback loops of the modern financial system have exposed it to a small risk of very large systemic shocks …

“Hence, we may be facing a paradox: while the financial system has been made more efficient and stable in normal times, it is also now more prone to excessive instability in really bad times.”

The authors urge a radical and swift re-examination of the global financial system’s operation by both policymakers and private sector institutions to seek ways to limit present and future dangers.

“New thinking may be urgently required,” they argue, calling for “increased public and private sector collaboration on stress testing, liquidity management, risk assessment and prevention”.

The report is set to form a key plank of the agenda for this month’s gathering of hundreds of world political and business leaders at the annual World Economic Forum in the Swiss resort of Davos.

It also highlights the security of future global food and energy supply, and the vulnerability of supply chains for distributing goods worldwide to serious disruptions, as among the crucial risks facing the world in coming years.

The forum cautioned world political leaders against neglecting critical but less immediate dangers such as climate change as they come under pressure to devote their attention to turbulent financial markets and geopolitical tensions.

Ignoring longer-term issues could simply make them even more intractable in future, it said. “Action to mitigate climate change, for example, may be put in danger should the world economy weaken substantially - even though many of the decisions which will shape the future path of the global climate will need to be made in the next five years.

“[Inaction] on long-term risks will only weaken the global capacity to manage future challenges.”

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