Private funding is "virtually unavailable" and banks will have to rely on public intervention, asset sales and consolidation, it said.

The six-monthly study also warns that eurozone economic growth will almost grind to a halt next year.

Growth in the 15 euro countries will fall to just 0.2% in 2009, it forecast.

The report argued that disruptions in the US financial system have "heightened the risk of a systemic financial crisis in Europe further".

However, it maintained that a full-blown crisis "remains improbable".

Economic slowdown

The slowdown has resulted from high oil prices, rising inflation, a strong euro, falling export demand and the financial crisis, the Fund reported.

However, amid the gloom, inflation will slow next year - allowing room for cuts in interest rates, it forecast.

Meanwhile, the Icelandic government has said it hoped to reach an agreement on an economic rescue loan from the IMF this week.

"We hope an agreement with the IMF can be reached today or tomorrow," said commerce minister Bjoergvin Sigurdsson after a cabinet meeting on Tuesday.

If Iceland does receive a loan from the IMF, it would be the first Western country to do so since 1976.

Inflation eases

The IMF said growth in the eurozone would be 1.3% this year and just 0.2% next year - down from 2.6% in 2007.

"While these projections were finalised before the crisis reached systemic proportions in early October, they remain broadly valid," the IMF said in a statement.

Europe's biggest economy, Germany would see no growth at all in 2009 after expanding by 1.8% this year, while France would grow by just 0.2% after gaining 0.8% in 2008.

However as Europe's economies slow, price rises will ease, allowing the European Central Bank scope to cut interest rates, says the IMF.

"While containing inflation remains a policy concern, nurturing the recovery is likely to gain policy prominence," it said.

BBC