Despite "unprecedented intervention" by central banks such as the Federal Reserve, "financial markets remain under considerable strain, now compounded" by a slowing economy, low levels of capital at financial companies and widespread efforts to unload debt, the fund said.
The U.S. mortgage and credit crises could cause almost $1 trillion in financial losses, the IMF said in an update to its Global Financial Stability Report, with $565 billion of those losses stemming from the residential mortgage market and related securities, and the rest from the commercial real estate, consumer credit and corporate debt markets.
That figure includes $200 billion in losses that banks have already announced, plus an additional $80 billion the banks have yet to write down, IMF officials said during a briefing.
The rest is held by other financial institutions, such as hedge funds and pension funds, the officials said.
"The deterioration in credit has moved up and across the credit spectrum to prime residential and commercial mortgage markets, and to corporate credit markets," said Jaime Caruana, director of the IMF's Monetary and Capital Markets department.
Credit markets have stabilized since last month, IMF officials said, when Bear Stearns Cos., the fifth-largest U.S. investment bank, was acquired by JPMorgan Chase & Co. at a fire-sale price.
But now, a weakening U.S. economy is placing "additional pressure on banks' balance sheets, which may limit their capacity to lend," Caruana said.
Caruana urged banks to seek additional capital so they can continue to lend and "avoid a credit contraction in the broader economy."
Caruana said investments earlier this year by government-run investment funds in large U.S. and European banks "have helped, but more may be needed to restore their lending capacity."
Government funds, also known as sovereign wealth funds, from China, Singapore and the Middle East invested more than $40 billion in Citigroup Inc., Merrill Lynch & Co. Inc., and Swiss bank UBS late last year and early this year.
The IMF is developing a voluntary code of best practices for the funds, which have sparked some concerns in the United States and Europe because they are government-run. Critics fear they could invest for noncommercial reasons, such as to obtain sensitive technologies.
While some sovereign fund managers, such as China's, have criticized the IMF's efforts, Caruana said the code could "help ... to mitigate some of the concerns" about sovereign funds.
"We think that it is very important to keep the financial system open and competitive," Caruana said.
Government regulation and supervision of the financial sector, along with private sector risk management, "all lagged behind the rapid innovation" of banks and securities firms, which resulted in "excessive risk-taking, weak underwriting ... and asset price inflation," the IMF said in its report.
Among other steps, the IMF recommended streamlining regulation of the financial sector to avoid subjecting banks and other financial firms to multiple supervisors.
Treasury Secretary Henry Paulson has proposed a regulatory overhaul along those lines that would eliminate some agencies and consolidate others. Most of Paulson's blueprint would require congressional approval, however, and is unlikely to be enacted before President Bush leaves office.
The IMF issued the update in advance of the spring meetings of finance ministers and central bank governors from its 185 member nations, which takes place this weekend in Washington. The IMF conducts economic analyses and provides loans and technical assistance to developing countries.