The United States will suffer a protracted economic downturn that will have a profound effect on investors in the developing world, the head of the International Monetary Fund (IMF) said yesterday.

Speaking to the Reserve Bank of India in Bombay, Dominique Strauss-Kahn rubbished the notion that Asia's fast-emerging economies — including India and China — had “decoupled” from the West and would remain immune to the aftershocks of the US sub-prime loans crisis.

The former French finance minister called the theory a “very misleading idea”.

He also suggested that policymakers in countries such as India, where keeping inflation in check is the main priority, may need to act to stimulate demand at home.

“We are in a globalised world, whether we like it or not,” Mr Strauss-Kahn said. “Global problems require global solutions.

“The US slowdown will be both significant and will last for some time ... There is no way to escape a rather long period of slowdown in economic growth.”

His assessment struck a similar tone to that of Henry Paulson, the US Treasury Secretary, who said over the weekend that the “current financial turmoil is serious and persisting” — although he made clear that he believed that the US would avoid a full recession.

Mr Strauss-Kahn used a weekend meeting of G7 finance officials in Tokyo to reiterate his call for an unprecedented global plan of co-ordinated fiscal action to mitigate the effects of the slowdown in America.

Mr Strauss-Kahn told the G7, which includes Canada, Italy and France, but not China, India or Russia, that fiscal measures from oil and commodity-rich nations that enjoy large budget and trade surpluses could support the global economy. He said that such countries accounted for about 20 to 25 per cent of global output.

As G7 ministers met on Saturday, President Bush was preparing to sign a $150 billion (£77 billion) package of tax rebates and other fiscal stimulus measures designed to stave off a full recession. The US Federal Reserve slashed its key lending rate by 1.25 percentage points last month.

Mr Strauss-Kahn's call for other countries to follow the American example marks a sharp turn in the thinking of the IMF, which usually calls for budgetary restraint.

However, other G7 nations — particularly Japan, which is deep in debt and is holding interest rates at 0.5 per cent — have little appetite for tax cuts and other tactics designed to reinvigorate demand. For many, the key issue is inflation, economists argued.

“The bigger problem in Asia and throughout much of the developing world is inflation,” Robert Prior-Wandesforde, of HSBC in Singapore, said.

“Those arguing that Asia and other emerging markets can't decouple from the US are forgetting one very important fact — they already have.”

Mr Strauss-Kahn said that he believed that no region would escape unscathed: “The linkages between the financial and real sector, developed and emerging markets, are much more complex than they were before.”

There are signs that emerging economies have been hit. India's flagship Sensex stock market index has lost about a fifth of its value since its record peak in mid-January.

The World Bank has cut its forecast for Chinese economic growth for 2008 to 9.6 per cent, down from 11.4 per cent last year, because of weaker overseas demand.

The IMF has cut its forecast for world growth this year to 4.1 per cent, down from an earlier forecast of 4.4 per cent and sharply lower than the 4.9 per cent growth seen in 2007.

It said that further downgrades were possible.

The official G7 communiqué issued on Saturday was criticised for its vague call for the group's members to “continue to take appropriate actions, individually and collectively, in order to secure stability and growth”.

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