The eurozone’s debt mountain poses a threat to global financial stability, the IMF warned yesterday, putting pressure on European banks to boost their capital to survive the crisis.

The IMF sounded the alarm in a world economic report that sharply lowered the IMF’s growth projections for the 17-nation eurozone to 1.6 per cent in 2011 and 1.1 per cent in 2012, down from 2.0 per cent and 1.7 per cent in a June forecast.

“Should the periphery’s debt crisis continue to propagate to core euro area economies, there could be significant disruption to global financial stability,” the IMF said in its “World Economic Outlook.”

European banks are “heavily exposed” to countries facing rising borrowing costs and lenders should make efforts to increase their capital following holes revealed by recent “stress tests” on the sector, the IMF said.

“A concern is that capitalisation of euro area banks is relatively low, and they rely heavily on wholesale funding, which is prone to freezing during financial turmoil,” the report said.

“Trouble in a few sovereigns could thus quickly spread across Europe. From there it could move to the US – by way of US institutional investors’ holdings of European assets – and to the rest of the world.”

After previously rebuffing IMF calls for a recapitalisation of Europe’s banks, the European Commission yesterday admitted that the sector may need more capital and would extend measures allowing states to rescue their banks.

“Sadly, as the sovereign debt worsens, more banks may need to be recapitalised, on top of the nine signalled in the July stress tests,” Mr Almunia said in a speech, referring to tests that most European banks passed.

With European banks struggling to raise dollars from US lenders wary of their exposure to the debt crisis, the world’s top central banks leapt into action last week to inject dollars into the sector.

The eurozone has battled for nearly two years against a debt crisis that is threatening to spread further, with Italy the latest country hit by a credit downgrade by ratings agency Standard & Poor’s yesterday amid persistent fears of a devastating Greek debt default.