Intensifying financial strains are taking an increasingly heavy toll on economic activity, the International Monetary Fund (IMF) said Wednesday.

One of the main channels for such macro-financial linkage is through tightening bank lending standards in both the United States and western Europe, said the IMF in its latest World Economic Outlook report.

This has occurred in response to bank's efforts to decrease their leverage in the face of reduced market tolerance for balance-sheet risk, increasingly expensive bank capital, and reduced access to wholesale funding, it said.

The IMF said that the financial crisis was increasingly affecting emerging markets too, reflecting rising risk aversion among investors, the reduced availability of funding for leveraged investors like hedge funds, and a weakening of growth prospects in emerging economies.

"The extent of damage of the economy depends on the initial strength of corporate and household financial positions and housing price developments," it said.

The U.S. economy seems particularly vulnerable because household balance sheets are stretched and the housing sector is undergoing a major correction, the IMF noted.

It said that the relatively strong initial position of the U.S. corporate sector and the rapid shift toward monetary easing were identified as mitigating factors.

Western European economies should gain some protection from the strong position of households, but would nevertheless also be at considerable risk from a sustained period of financial stress, the IMF said.

The semiannual World Economic Outlook report came a few days before the annual meeting of IMF and its sister institution World Bank in Washington on Oct. 13.

(Xinhua News Agency October 9, 2008)