A stark warning from the IMF that the world’s developed economies are collectively set to endure their first full-year contraction since the Second World War, triggering a global recession, sent shares plummeting again on both sides of the Atlantic.

In its bleakest assessment yet of rapidly worsening global prospects, the International Monetary Fund predicted that industrial economies as a whole will shrink through next year by 0.3 per cent, in the worst such slump of the postwar era.

The IMF said that the toll imposed by the downturn across the West would sap the strength of the world economy and cut global growth next year to an anaemic 2.2 per cent. That is down 0.8 points from its last forecast, made only a month ago, and is below the 2.5 per cent threshold at which the world economy is judged to be in the grip of global recession.

Shares plunged in New York, in London and across Europe as the IMF’s grim prognosis fuelled alarm among investors about the economic peril now confronting the world.

In London, the FTSE 100 index plunged by another 258.33 points, or 5.7 per cent, to 4,272.41, leaving it down by more than a third so far this year. In Europe, Germany’s Dax index sank 6.8 per cent, while France’s CAC 40 closed down 6.4 per cent.

In New York, the Dow Jones industrial average of leading US blue chips sank by 4.85 per cent, and the broader-based S&P 500 index fell by more than 5 per cent, leaving American equities nursing their worst two-day loss since October 1987.

As leaders, finance ministers and central bank governors of the key Western and emerging market economies prepare for two weekends of crisis talks – with “G20” meetings in São Paulo this weekend and in Washington next Saturday – the IMF urged governments to ramp up tax and spending measures to shore up global economic activity.

“There is a clear need for additional policy stimulus relative to what has been announced so far,” the fund said. “Room to ease monetary policy should be exploited.”

It added: “Financial stress is likely to be deeper and more protracted than envisaged [in its October forecast].”

The IMF’s call for still more far-reaching measures to boost global growth came as it drastically cut its already dire forecasts for all of the world’s big economies. It now predicts that the US economy will shrink by 0.7 per cent next year, compared with its October forecast of meagre 0.1 per cent growth. In the eurozone, GDP is expected to drop by 0.5 per cent, down from the fund’s October expectation of a 0.2 per cent expansion. Britain is now forecast to bear the brunt of the global slump, with its GDP plunging by 1.3 per cent in what would be the worst year for the UK since the economy shrank by 1.4 per cent in 1991.

In emerging and developing countries, the IMF now expects growth next year of 5.1 per cent – down a full percentage point from its October view as the knock-on impact of the West’s plight ripples around the world.

Olivier Blanchard, the IMF’s chief economist, said that although action by the world’s governments and financial authorities to stem the crisis had been aggressive and comprehensive, further flare-ups in the economic crisis were likely. “We can’t be sure that there are no landmines left in the field,” he said.

Mr Blanchard added that the spectre of Japanese-style deflation also loomed over the developed economies, although he believed that the probability of such a trend, with prices generally falling on a sustained basis, was still small. He cautioned that in some countries, such as the US where interest rates now stand at 1 per cent, there was only limited room left to shore up activity with rate cuts, so that governments would have to resort to using fiscal policy.

In the US, Nancy Pelosi, Speaker of the House of Representatives, said that Congress would consider a two-stage effort to boost the economy. She told The Wall Street Journal that she would push for a stimulus package of up to $100 billion in the “lame-duck” session of Congress this month, to be followed by more action next year that should include a permanent tax cut.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts