The International Monetary Fund upgraded its 2010 global growth forecast on Thursday, citing robust expansion in Asia and renewed U.S. private demand, but warned the euro area's debt crisis posed a big risk to recovery.

The IMF said the euro zone's sovereign financing problems and resulting financial market turbulence were significant challenges, especially with the web of financial and trade links connecting Europe to the world. However, a double-dip world recession was highly unlikely.

The fund raised its 2010 global output forecast to 4.6 percent from 4.2 percent in April's review of the global economy, but kept its 2011 view unchanged at 4.3 percent.

The world economy shrank 0.6 percent in 2009 as a result of the global financial crisis.

What has happened in Europe is likely to slow down the path to recovery relative to what could have happened, but I think the chances of a double dip are very small, as you know we're forecasting fairly strong growth for the world economy this year, Olivier Blanchard, the IMF's chief economist, said at a briefing in Hong Kong for the organization's latest World Economic Outlook and Global Financial Stability reports.

It was the first time the IMF updated these reports from Hong Kong.

The euro fell 8 percent in the second quarter of 2010, the largest quarterly decline since the first quarter of 2009, on fears that some European countries in the currency group may not be able to dig themselves out of their deep debt holes.

While uncertainty about bank regulation has added to investor concerns, the IMF focused the majority of both reports on the implications of the euro zone sovereign crisis.

In the news briefing, Blanchard said the European bank stress test disclosures due on July 23 were an important step toward transparency but underscored that countries must return to a sustainable level of fiscal spending.

Under one scenario -- assuming shocks to the global financial system resulting from Europe's debt problems are as severe as those experienced in the wake of Lehman Brothers' failure in 2008 -- world GDP growth in 2011 would be reduced by 1.5 percentage points, the IMF said.

SOME 2011 GDP FORECASTS CUT

Persistent weakness in the U.S. housing and labor markets, euro zone debt problems and a slowdown in growth of manufacturing activity in Asia have made investors speculate the global economy will slow sharply for the rest of the year.

The IMF on Thursday cut its 2011 growth forecasts for Britain, Canada, the euro zone, emerging economies and Japan.

The euro area's 2010 GDP was seen expanding 1 percent, unchanged from April, although the 2011 GDP forecast was trimmed by 0.2 percentage point to 1.3 percent.

The biggest upward revisions to growth were in developing economies. Brazil's 2010 growth forecast was raised by 1.6 percentage points to 7.1 percent and its 2011 forecast was lifted by 0.1 percentage point to 4.2 percent.

The IMF also raised its 2010 forecast for China's growth to 10.5 percent from 10.0 percent.

Blanchard said Beijing's shift last month to allow more flexibility in the yuan was headed in the right direction. The IMF has said before the yuan is significantly undervalued.

Jose Vinals, the IMF's financial counselor and director of the monetary and capital markets department, downplayed talk of a collapse in China's real estate market.

Asked if a bubble was forming in Chinese property, he told Reuters Insider TV: It's too early to say this is the case. I think that this is not likely to be the case if these measures are effective as we expect them to be.

Kenneth Rogoff, former chief economist at the IMF, speaking at a conference in Hong Kong on Tuesday, said China faced a property market bubble. Although officials were doing the right thing by trying to clamp down on real estate, the ultimate impact on the banking system was uncertain, he said.

Blanchard said the IMF was working with China to bring more clarity on bank lending to local governments. Official Chinese data show Chinese banks may have as much as $1 trillion in loans to local governments on their books.

We think it is manageable but we think it has to be much more transparent. And maybe some of the loans that were made were unwise, Blanchard said.

(Additional reporting by Kei Okamura)

(Writing by Kevin Plumberg; Editing by Kazunori Takada)