IMF issues warning about European banks

Without "urgent" recapitalisation, "we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis," she said, according to Bloomberg.

"The most efficient solution would be mandatory substantial recapitalisation - seeking private resources first, but using public funds if necessary," she added, suggesting that the eurozone’s €440 billion rescue fund could be used for capital injections into the banks.

Her comments - unusually strong for such a senior policymaker - risk further spooking investors, who already have concerns about the exposure of European banks to sovereign debt.

Doubts about the health of European lenders have persisted despite high-profile stress tests, with the latest round of results on 90 banks published in mid July.

Lagarde’s blunt assessment received immediate support from Angela Knight, the chief executive of the British Bankers’ Association.

"I think she is right: some European banks should hold more capital as action is urgently required to stabilise the situation inside the eurozone."

The IMF chief also issued a stark warning about a new global economic slowdown.

"Developments this summer have indicated we are in a dangerous new phase," she said. "There remains a path to recovery, but we do not have the luxury of time."

Speaking at the same conference, Jean-Claude Trichet, outgoing head of the European Central Bank, defended the 17-nation eurozone, noting that the US was also a regionally diverse economy under a single currency.

He did admitted that decision-making in the single currency area could be improved, however.

"As a group, as an entity, we are challenged paradoxically not because our fundamentals are very bad. Our fundamentals are not very bad. The problem is that we are challenged in our governance."