The Washington, DC-based multilateral lender said the world economy will shrink 2.9 per cent in 2009 - worse than its previous forecast of a 1.7 per cent contraction - as banks continue to get their balance sheets back into shape.

The warning tapped into a growing mood in the markets that the improvement in the economic data has not been strong enough to justify the stock market rally since March.

Last week, the world's major indexes saw broad losses, while oil prices slipped back from six-month highs above US$70 a barrel.

Economic slowdown

"The concern seems to be that we were all perhaps a little too soon in thinking that the worst of the economic slowdown was behind us, and for now at least, discretion may be the better part of valour - until there are more concrete signs of a sustainable recovery," said David Jones, chief market strategist at IG Index.

In Europe, the FTSE 100 index of leading British shares closed down 111.88 points, or 2.6 per cent, at 4,234.05, while Germany's DAX ended 146.06 points, or three per cent, lower at 4,693.40.

The CAC-40 in France was 98.02 points, or three per cent, lower at 3,123.25.

On Wall Street, the Dow Jones industrial average was down 154.70 points, or 1.8 per cent, at 8,366.44 around midday New York time while the broader Standard & Poor's 500 index fell 22.56 points, or 2.5 per cent, at 898.67.

In oil markets, benchmark crude for July delivery fell $2.70 to US$66.85 a barrel.

Energy-dependent

That decline, on top of the near US$2 decline on Friday, hit oil stocks around the world and pushed the energy-dependent MICEX, Russia's main stock market, down nearly 8.0 per cent.

"Until now markets have been able to find support from the fact that the global economy was not about to fall off a cliff and financial markets were not going to implode. Now markets need more," said Mitul Kotecha, an analyst at Calyon Credit Agricole.

In light of the current unease, investors will be closely looking at Wednesday's statement from the US Federal Reserve.

Though the Fed is widely expected to keep its benchmark interest rate in the range of zero to 0.25 per cent, investors will be focusing on what it says about current economic prospects and how long it expects to keep monetary policy as accommodating as it is.

Most analysts think the Fed has a difficult balancing act - expressing the view that the worst of the recession is over at the same time as not spooking investors into thinking that interest rates will rise any time soon.

Some gainers

There were some gainers Monday, most notably mining company Anglo American PLC, which rose around 6.0 per cent after Xstrata PLC made a tentative merger approach.

Offsetting Anglo's gains was British Airways PLC, which fell around 8.0 per cent, after Richard Branson, the boss of archrival Virgin Atlantic, suggested the flag carrier was near worthless.

Earlier in Asia, optimism about China's economic outlook helped shares advance, with Japan's Nikkei 225 stock average closing up 40.01 points, or 0.4 per cent, to 9,826.27, and Hong Kong's ending 138.62 points, or 0.8 per cent, higher at 18,059.55.

Elsewhere in Asia, South Korea's Kospi climbed 1.2 per cent to 1,399.71 and Australia's benchmark added 0.5 per cent to 3,918.2.

In currencies, the dollar fell 0.4 per cent to 95.86 yen while the euro declined 0.6 per cent to $1.3852.

- AP