The European Bank for Reconstruction and Development has raised the growth outlook for its region but warned of possible fallout from European sovereign debt problems.

The EBRD said it was raising its 2011 growth forecast for its zone of operations from the 4.2 per cent predicted in January to 4.6 per cent.

The London-based EBRD was formed in 1991 to help former communist nations in their transition to market economies. It tends to invest in private enterprises together with commercial partners.

“Growth prospects for the economies in the EBRD region have improved, but concerns are growing about the possible fallout from sovereign debt problems in some euro zone countries and inflationary pressures are emerging as a new risk,” the bank said in a statement.

The bank was holding a two-day meeting in the Kazakh capital Astana to discuss an expansion of its zone of activities to include North African countries following the region’s uprisings.

The EBRD began the meeting by focusing on the economic changes affecting the 60-odd nations that hold a stake in the bank.

It issued a carefully-worded statement that balanced the optimistic forecast with gloomy warnings about what could go wrong for the region if Western Europe fails to recover from its debt crunch.

Growth was seen picking up on the back of stronger consumer consumption and a recovering labour market.

“Domestic demand, rather than exports, is now driving the recovery,” the bank said.

It added that other positive factors included “the fact that the weakening of the labour markets is bottoming out in many countries” and that credit growth was picking up in Russia and parts of Eastern Europe and the Caucasus.

But it also cautioned that this greater activity was dangerously dependent on the region’s ability to withstand the effects of the fiscal crises affecting nations such as Portugal and Greece.

“Looking to specific risks, the EBRD report points to possible financial turmoil as a contagion risk for countries with financial systems that are deeply integrated with the euro zone,” the statement said.