With intensifying strains in the euro area weighing on the global outlook, the International Monetary Fund (IMF) has sharply cut its forecast for world growth this year, saying prospects have dimmed and risks to financial stability have increased.

In an update to its World Economic Outlook (WEO), the IMF said that the euro area would fall into a mild recession in 2012 after the euro area crisis entered a “perilous new phase” toward the end of last year, affecting other parts of the world including the United States, emerging markets, and developing countries.

Overall, activity in the advanced economies is now projected to expand by just 1.2 percent in 2012—a downward revision of ¾ percentage points relative to the forecast last September—picking up to a still tepid 1.9 percent the next year. The global growth outlook for this year is 3.3 percent.

“Given the depth of the 2009 recession, these growth rates are too sluggish to make a major dent in very high unemployment,” the IMF said.

With the revised forecast, the IMF also released updates on January 24 to its Global Financial Stability Report (GFSR), which tracks issues in banking and capital markets, and its Fiscal Monitor, which tracks government debt and budgets.

Europe is Epicenter

“The outlook for growth is mediocre, and it could be worse,” said Olivier Blanchard, the IMF’s Economic Counsellor.

At a press conference in Washington D.C., Blanchard said that “the world recovery, which was weak in the first place, is in danger of stalling.  The epicenter of the danger is Europe, but the rest of the world is increasingly affected.”

He told reporters there was an even greater danger if the European crisis intensified. “In this case, the world could be plunged into another recession,” he said.

But Blanchard said that with the right set of measures, “the worst can definitely be avoided, and the recovery can be put back on track. These measures can be taken, need to be taken, and need to be taken urgently.”

In a speech in Berlin on January 23, IMF Managing Director Christine Lagarde laid out the main elements of a policy path forward. Europe, which is at the center of global concerns, needs stronger growth, larger firewalls, and deeper integration, she said, but added that other economies also have an important role to play to restore balanced global growth. As for the multilateral component, Lagarde said that the IMF was ready to help and was seeking to increase its lending resources by up to $500 billion.