International Monetary Fund chief Dominique Strauss-Kahn said on Thursday the Chinese yuan should be given a greater role within a restructured international monetary system.

Strauss-Kahn, speaking at the IMF's headquarters, said that adding emerging market countries' currencies such as the yuan to a basket of currencies that the IMF administers would benefit the global system and create more stability.

He warned that without adjustments to the global monetary system the world could be sowing the seeds of the next crisis, pointing to widening economic imbalances, large and volatile capital flows, exchange rate pressures and rapidly growing excess reserves.

Strauss-Kahn's remarks about the yuan do not mark a policy shift for the IMF, which has always urged more participation by China in the world economy, but it does expand on its stance.

Its timing was significant because it comes ahead of next week's meeting in Paris of finance chiefs from the Group of 20 rich and developing nations.

Strauss-Kahn said he also saw a greater role for the IMF's Special Drawing Right as a unit of account, but said such a move would take time and a great deal of international cooperation to make it work. The SDR is composed of the dollar, sterling, euro and yen.

Increasing the role of the SDR would clearly require a major leap in international policy coordination, Strauss-Kahn said. For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy.

He said overhauling the global monetary system could bolster the economic recovery and help avoid future crises.

Strauss-Kahn's speech comes as debate over the U.S. dollar's status as the main global reserve currency is set to intensify amid G20 discussions, especially with emerging market economies providing most of the world's growth.

In my opinion, reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system's ability to prevent future crises, Strauss-Kahn said.

But bringing the yuan into the SDR is not simple.

Among the drawbacks is that the yuan is not freely traded and China's capital markets are largely closed. Beijing has been expanding a pilot program to encourage use of its currency in cross-border trade in what economists say is part of a strategy to raise the currency's profile.

The SDR is not itself a currency but an IMF accounting unit. It is only used as a reserve asset by central banks and is not available to the private sector.

The IMF's board was cautious about giving the SDR a greater role saying it should not substitute for the efforts underway to strengthen the international monetary system's stability.

Still, members acknowledged that an enhanced role for the SDR could potentially contribute to the long-term stability of the global monetary system.

An IMF paper released alongside Strauss-Kahn's speech said the U.S. dollar would remain the most important global reserve currency for the foreseeable future.

But the paper noted there was a place within the system for the SDR to reduce currency volatility and ensure countries have easier access to foreign exchange funding during crises. It said that using the SDR to price global trade would provide a buffer from exchange rate volatility, while the issuance of SDR-denominated bonds could create a potentially new class of reserve assets that could involve the private sector.

(Editing by Neil Stempleman and James Dalgleish)