The International Monetary Fund (IMF) said on Wednesday that the global economy faces key risks including interest rate increase, oil prices rise and global imbalance in economic growth although the cyclical rebound of the world economy could continue to be stronger than expected.

In its semi-annual World Economic Outlook (WEO) released before the joint spring meeting of IMF and the World Bank, the IMF said that one of the risks facing the world economy is that financial market conditions could tighten significantly.

A sharp increase in long-run interest rates in the United States -- which have risen by 50 basis points since early last February -- would adversely affect domestic demand, especially if driven by a rise in inflationary expectations or weaker foreign demand for US securities, said the WEO.

The report also warned that the sharp increase in US rates may prompt significant financial market deleveraging and downward adjustments in prices of riskier assets, underscoring the need for vigilance by both supervisors and regulators and leading to significant deterioration in emerging market financing conditions.

The rising world oil prices is another risk affecting the steady world economic growth, the IMF said.

Oil prices had risen about six dollars a barrel above the baseline for 2005 as projected by the last WEO, and the market remains highly vulnerable to shocks with significant upside risk over the longer term, the WEO said.

The fact that the global economic expansion is becoming increasingly unbalanced is another risk facing the world economy, the IMF said.

Global growth remains unduly dependent on the United States and China while growth in the euro area and Japan -- together accounting for nearly on fourth of global output -- has once again been disappointing, the WEO report said.

If this situation persists, the report said, it will widen global imbalance and would raise the risks of a more significant slowdown later on, especially if growth in the United States and China were to weaken simultaneously.

The IMF said that global imbalance of current account has deepened and IMF projections suggest little improvement in the foreseeable future.

The report said that US external deficit has so far been financed relative easily, aided by continued financial globalization. However, the demand for US assets is not unlimited and a continuing sharp rise in US net external liabilities will carry increasing risks to both the US and the world economic growth.

Other risks facing the world include difficulty-ridden fiscal positions in many countries, which poses a significant medium-term threat to macroeconomic stability, the report said. Structural weakness also constrain growth in key areas such as euro area and Japan and increase vulnerability to shocks.

The IMF called on developed countries to pay attention to appropriate timing and pace in increasing interest rates and adopt appropriate economic and fiscal policies to address the medium- term risks outlined in the WEO report.

It also said that, from a multilateral perspective, successful and appropriately ambitious trade liberalization under the Doha Round remains critical to support medium-term global growth.