The International Monetary Fund has reduced its outlook for the world economy, warning that high oil prices and America's massive current account deficit could dampen growth in 2005.

Rodrigo Rato, the IMF's director general, told the Frankfurter Allgemeine Zeitung that the fund had downgraded its forecast for global growth of 4.3 per cent next year.

Mr Rato said that the new forecast of "not below 4 per cent" took into account record-high oil prices and America's fiscal and current account deficits.

In September, the IMF said that the world economy would grow by 5 per cent in 2004, the fastest rate seen since the 1970s.

Speaking after a meeting with the Russian President Vladimir Putin, Mr Rato said that the United States should step up efforts to reduce its budget deficit.

An accelerated reduction of America's public borrowing would give the US more room for manoeuvre in other areas, such as the reform of the health and social security systems, he said.

The IMF chief also said that an increasing number of countries in Europe had not shown growth of more than 2 per cent despite of relatively benign economic conditions.

In the face of sluggish growth he urged eurozone members such as Germany to make their labour markets more flexible, their product markets more competitive and to become less bureaucratic.

He added that Asian foreign exchange rates should better reflect economic fundamentals. Nodding towards a mooted unpegging of the Chinese yuan from the weakening dollar, he suggested that a market-led appreciation of the Chinese currency would be welcome.

"We also think it is in the interests of the Asian economies to give themselves exchange rate mechanisms which better reflect their economies and make them better able to absorb economic shocks," he said.

At the G20 meeting in Berlin at the weekend, the finance minister and central bank chiefs of the world’s 20 most powerful economies said they expected the global economic environment to remain favourable next year.

However in the final communique, the meeting's participants warned that economic risks had increased as a result of oil price fluctuations, the US budget and current account deficits and "geo-political concerns".

"We underscored the importance of medium-term fiscal consolidation in the United States, continued structural reforms to boost growth in Europe and Japan, and, in emerging Asia, steps towards greater exchange rate flexibility, supported by continued financial sector reform, as appropriate," they said.

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