The International Monetary Fund sharply raised its global economic growth forecast, casting developing countries in a leading role while rich nations struggle with high unemployment and government debt.

In an update of its World Economic Outlook, the IMF said on Tuesday the world economy will expand by 3.9 percent in 2010, much higher than the 3.1 percent it projected in October, and the pace will pick up to 4.3 percent next year.

I don't think we're that optimistic but we're less pessimistic than we were in the last World Economic Outlook in October, IMF chief economist Olivier Blanchard told Reuters Television in an interview.

If you look at what our forecasts are for the recovery in the major advanced countries, these are still weak numbers. They're better than they were six months ago, but they're still quite mediocre, he added.

While an economic recovery appears to be gaining traction, the IMF warned the financial system remains fragile in the richer countries and banks will need a lot more capital.

Lending remains lackluster in advanced economies, which will constrain their pace of growth. Because of that the IMF reiterated its view that it was too soon to raise interest rates or remove many of the emergency financial supports put in place by central banks during the recent financial crisis.

As a group, advanced economies are expected to expand 2.1 percent this year and 2.4 percent in 2011, the IMF said.

In emerging and developing markets strong internal demand will provide relatively vigorous growth, the IMF said. It warned, however, that the flow of capital into many of these countries was becoming a growing concern because it could lead to asset price bubbles and appreciations in currencies.

The IMF revised up its growth forecast for emerging and developing countries by almost 1 percentage point to 6 percent in 2010 and higher to 6.3 percent in 2011.

The IMF said the rise in asset prices in emerging market economies, caused by strong capital inflows, cannot yet be considered excessive and widespread.

The Fund dismissed concerns that strong capital inflows into China posed a serious risk of a market bubble.

Asset prices in some specific sectors in some specific regions of China may be frothy but there is certainly no widespread asset bubble, Jorg Decressin, who heads the IMF's world economic studies division, told a news conference.

The Fund upgraded its growth forecast for China to 10.0 percent this year but projected it would slow to 9.7 percent next year.

It said it was pretty bullish about India, where it sees the economy growing about 7.7 percent this year and 7.8 percent in 2011.


The IMF revised up its growth forecast for the United States to 2.7 percent this year from 1.5 percent it estimated in October, saying leading indicators in the third quarter of 2009 showed a stronger-than-expected recovery.

The Fund said, however, that U.S. growth would slow next year to 2.4 percent as economic stimulus measures were withdrawn.

It said the pace of recovery in euro zone countries would be slightly stronger this year, revising up its forecast to 1.0 percent for 2010 versus 0.3 percent it estimated just three months ago. The recovery in the euro zone would pick up to 1.6 percent next year, it added.

Only Spain will remain in recession in the euro area this year, the IMF said, forecasting a contraction of 0.6 percent in 2010 before it slowly resumes growth at 0.9 percent in 2011.

Decressin said Spain's high unemployment rates would weigh for some time to come and more wage flexibility was needed to jump-start hiring and reestablish competitiveness.

The Fund maintained its 2010 forecast for growth in Japan at 1.7 percent but saw the economy expanding by 2.2. percent next year.

The IMF said many central banks can afford to maintain low interest rates this year as underlying inflation is expected to remain low and unemployment stay high for some time.

The Fund said because of the fragile nature of the recovery, fiscal policies should remain supportive and stimulus measures planned for 2010 should be fully implemented.

(Editing by James Dalgleish)