Stock market haemorrhages and poor business confidence could delay recovery in the global economy until well into 2003, and the impact of any war in Iraq creates uncertainty that is hard to gauge, the OECD said.

Leading central banks should keep interest rates low in the near future, and push them lower in the 12-nation euro zone, to shore up growth because the economic upturn spotted last spring faltered as 2002 wore on, the Paris-based group said.

"The global recovery is slow and irregular," the Organisation for Economic Co-operation and Development, whose 30 member countries account for most of the world's wealth, said in its Economic Outlook, a twice-yearly report.

It nevertheless forecast improvement, predicting growth of 1.5 per cent this year, 2.2 per cent in 2003 and three per cent in 2004 for the OECD grouping as a whole.

For the key US economy, it forecast growth of 2.3 per cent in 2002, 2.6 in 2003 and 3.6 in 2004. Rate cuts had helped and had yet to fully feed through but tax cuts and other government steps were creating a big deficit in public finances, it said.

In the euro zone, the OECD forecast growth of 0.8, 1.8 and 2.7 per cent respectively. For Japan, in the doldrums for a decade, it forecast shrinkage of 0.7 per cent this year, followed by modest expansions of 0.8 and 0.9 per cent in 2003 and 2004.

The OECD said it only expected the world economy to start firing on all cylinders in 2004. "Forward looking indicators show that a solid recovery may be rather slow to materialise," it said.

There were many reports highlighting the risk of reduced US car manufacturing and recession in the euro zone manufacturing sector.

While there had been signs of recovery earlier this year in the United States and relatively solid European growth, those economies then ran into "substantial headwinds", it said.

With United Nations weapons inspectors starting up again in Iraq but continued doubts over US determination to wage war, the OECD broached the economic risks of another Gulf conflict.

"What would happen to the physical supply and the price of oil if war broke out is unclear," it said. Oil prices spiked to more than $40 a barrel when Iraq's invaded Kuwait in 1990 but fell to $30 before Desert Storm began and to $20 after the US-led was against Baghdad ended, it said.

A second Gulf war could be different because it would happen at a time when the world economy was in a weak recovery phase rather than at the tail-end of a boom, it said.

OECD simulations calculated that an oil price rise of $10 a barrel could push inflation up by half of a percent and reduce economic output by about a quarter of a percentage point, if the price rise lasted a year.

Tumbling stock markets was another danger it highlighted. Stock market prices had plunged to lows unseen since the mid-1990s in the United States and Europe, and since the early 1980s in Japan, the OECD said. Scandals like the accounting scam that toppled US energy giant Enron had seriously rattled investor and business confidence.

OECD chief economist Jean-Philippe Cotis said in the report that corporate profit prospects were now better but professional investors and households would need time to regain confidence and spend.

The global recovery was "slow and fragile" and heavily dependent on developments in the United States, he said.

"The general slide in equity prices is also restraining consumption in accordance with the traditional wealth effect," the report said. US citizens owned more shares relatively and were more prone to this, but others felt a knock-on impact.

Further stock price falls could not be ruled out even though share prices were now considered to have worked off the fat that was added during a period of excess, it said.

"The bottom may not have been reached yet."

The OECD said Latin America had suffered hard in 2002 due to financial turbulence in Brazil and above all Argentina, although Mexico had managed to steer clear of the instability and loss of foreign investment.

"The region as a whole has also suffered from a significant drop in foreign direct investment," it said. Even Chile, whose economy is the best rated in the region, was weakened by the turmoil, it said.

On China, a hugely bright spot when compared to the ills of the big industrialised economies of the West, the OECD said the authorities should overhaul the country's banking and financial system to secure sustainable growth.

From an expected growth rate of 7.9 per cent in 2002, growth would slow to 6.9 per cent in 2004, the OECD forecast.

In central and eastern Europe, where countries are queuing up to join the European Union and eventually the euro currency, the OECD cut its growth forecasts for some of the big players like Poland, Hungary and the Czech and Slovak republics.

While it was still forecasting relatively healthier growth rates in those countries than in the euro zone they want to join, the OECD scolded governments for spending too much and borrowing too heavily.