Are some of the world's largest economies about to break down?

"Co-operative adjustment" to the value of some Asian currencies would help reduce the danger, the body said.

Growth in the industrialised world this year already will miss forecasts, held back by a sluggish Europe and Japan.

The OECD called on the European Central Bank to cut interest rates, saying the war in Iraq, strong euro and high oil prices were only partly to blame.

Growing problem

The Organization for Economic Cooperation and Development (OECD) - a Paris-based club of developed countries - made the comments in its twice-yearly report.

The OECD's main concern is the size of the US current account deficit - the difference between the total value of imported and exported goods and services.

One of the problems facing the US is that demand for cheaper Asian products is outstripping sales of domestic goods, with the US complaining that a number of currencies are being kept artificially low to boost demand.

OECD 2005 GROWTH FORECASTS US 3.6% Japan 1.5% Eurozone 1.2% OECD 2.6%

That imbalance has increased the likelihood of a sudden drop in the value of the dollar, said the OECD's chief economist Jean-Philippe Cotis.

And that could have a significant knock-on effect should US consumers stop spending.

"A falling dollar would not only curtail net exports, but also domestic demand in Japan and Europe, where resilience is low and monetary and fiscal room for manoeuvre is limited," Mr Cotis said.

"Although not the most likely outcome at present, such an unpleasant scenario is looming larger."

Looking inwards

The OECD recommends shifting the focus of economic growth away from driving exports and into stoking domestic demand.

In some thriving Asian economies, that would include allowing currencies to strengthen.

What is badly lacking is sustained momentum in the eurozone Jean-Philippe Cotis, OECD

"Co-operative adjustment would involve exchange rate appreciation and a reappraisal of the role of monetary policy", the OECD said.

Europe would be one of the places that would most benefit from an increase in the domestic demand, especially as it may help "avert a stalling of economic reforms".

"What is badly lacking is sustained momentum in the eurozone," Mr Cotis said. "It is becoming increasingly evident that circumstantial arguments are not sufficient to explain the string of aborted recoveries in Continental Europe."

The OECD cut its 2005 growth forecast for the eurozone to 1.2% from 1.9%, citing the strong euro and high oil prices.

Further afield

In the US, growth is expected to be 3.6% in 2005 and the OECD predicts that the US Federal Reserve will continue to raise interest rates to counter the threat of accelerating inflation.

In contrast, Japanese borrowing costs will probably stay at zero through 2006, as growth slowly rises from 1.5% this year to 1.7% in 2006.

The Bank of England is unlikely to lift interest rates from their current level of 4.75%, the OECD said.

The organisation was more robust with its comments to the European Central Bank (ECB), however, and called for "an early easing of monetary policy".