In an update of its April projections for the world economy, the IMF said the pace of growth is set to slow to 4.1 percent in 2008 from 5 percent in 2007 and to ease further in 2009 to 3.9 percent.

But those estimates were better than it foresaw in April when it predicted world growth would slow even more steeply to 3.7 percent in 2008 and 3.8 percent in 2009. For details, click on.

Explaining the changes in the global figures, IMF chief economist Simon Johnson said the effects of turmoil stemming from a U.S. subprime lending crisis were still filtering through the global economy, at a slower rate than previously expected.

He also said a U.S. fiscal stimulus package was also cushioning spending by American consumers, at least temporarily.

The IMF now estimates the U.S. economy will expand 1.3 percent in 2008, rather than 0.5 percent it estimated in April. It said growth in 2009 would be 0.8 percent instead of 0.6 percent.

But it stressed key problems were on the horizon.

"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing countries," the IMF said.

Johnson said the IMF still believed there is a chance of a global recession, with the world economy growing at a significantly slower pace following 5 years of rapid growth.

In April, the IMF warned there was a 25 percent chance world growth will drop to 3.0 percent or less, a level that would be considered recessionary.

He said financial market conditions were still "very fragile" and not likely to dissipate anytime soon.

"In the recent past, the global economy has managed to take large shocks in stride but we think its capacity to absorb them is being increasingly challenged," Johnson told reporters.

The IMF warned that inflation was mounting everywhere but rising faster in emerging and developing economies driven by higher fuel and food costs.

It revised up slightly growth forecasts for emerging and developing economies to 6.9 percent in 2008 and 6.7 percent in 2009, which is still sharply down from the 8 percent expansion in 2007. It said China's economy was expected to slow to around 10 percent from about 12 percent in 2007.

In emerging economies, raising interest rates and more fiscal restraint are needed, and in some cases more flexibility in exchange rate regimes should be introduced to deal with rising inflationary pressures, the IMF said.

The case for raising interest rates in major advanced economies was less compelling, the fund said, given that inflation expectations and labor costs are expected to remain well anchored as growth weakens. Still, it said inflationary pressures need to be closely monitored.

The IMF raised its growth estimate modestly for the euro-area countries to 1.7 percent from an April projection of 1.4 percent. It maintained its forecast for 2009 at 1.2 percent.

Japan's economy was now likely to expand by 1.5 percent this year and next, it said, a pinch more than the 1.4 percent the IMF projected for 2008 in April.

The IMF said oil and food prices are expected to remain high and volatile, with financial conditions temporarily forcing prices higher.