The IMF on Tuesday cut its growth forecast for China's export-driven economy, saying that turmoil in Europe and the United States, as well as a sustained anti-inflation drive, would take a toll.

Warning the world had entered a "dangerous new phase", the Washington-based lender urged Beijing to rebalance its economy "as fast as possible" and allow the yuan to strengthen to contain inflation and help revive overseas markets.

In its latest World Economic Outlook, the International Monetary Fund said China and other Asian nations that have long relied on exports to developed markets must build up domestic demand to compensate for faltering global trade.

"A stronger exchange rate, combined with structural reforms, would raise domestic purchasing power and allow external rebalancing, while also containing inflation pressure," it said of China.

The IMF downgraded its forecast for gross domestic product in China -- the world's second largest economy -- to 9.5 percent in 2011 and 9.0 percent in 2012, slower than the country's average pace of 10.5 percent from 2000-2007.

Its previous forecast announced in June was for 9.6 percent growth this year and 9.5 percent in 2012.

The IMF said inflation pressures in China -- a major bugbear for leaders worried about the potential for high prices to trigger social unrest -- remained an issue.

But the authorities' efforts to stem a flood of credit have been gaining traction, the report said.

"Property price inflation and credit growth have softened from recent record levels," it said.

China has implemented a number of policies during the past year to try to slow inflation, including restricting the amount of money banks can lend and hiking interest rates five times since October last year.

In a sign that these policies may be starting to work, the consumer price index -- the main gauge of inflation -- rose 6.2 percent in August, down from a more than three-year high of 6.5 percent in July.

But analysts have warned that price pressures will continue to put pressure on the government and poured cold water on hopes that authorities might relax monetary policy as the global economy slows.

Premier Wen Jiabao said last week he "cannot relax" due to China's higher prices and vowed to step up the fight against the politically sensitive inflation rate.

The IMF also urged Beijing to allow the market to determine interest rate levels which would "create incentives for financial institutions to better manage market risks" and "remove the artificially low cost of capital".

Despite repeated pledges by Chinese leaders to boost the contribution of domestic consumption to economic growth, the country remains heavily reliant on exports and investment to grow, making it vulnerable to global downturns.

"Plans to rebalance from foreign to domestic demand... must be implemented as fast as possible," the IMF said.

"Only with this global rebalancing can we hope for stronger growth in advanced economies and, by implication, for the rest of the world."

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