The International Monetary Fund (IMF) said Monday that euro area still needs to do more to clean up its banking sector, weakened by the global financial crisis.

"The worst of the decline of activity is now very likely behind us but the timing and the shape of the recovery remain highly uncertain," the Washington-based IMF said after its annual consultations with the 16 eurozone economies.

Government actions taken so far have helped stabilize the European banking system, but policymakers needed to take "further decisive action, especially in the financial sector," the IMF said in a statement.

"The banking sector is key to a sustainable recovery," it pointed out.

It noted that conditions for access to bank lending were tight, funding costs remained high, and some segments of the financial markets were functioning poorly.

"Moreover, sizeable losses lie ahead as the recession unfolds. As a result, the financial sector is hamstrung in fulfilling its vital intermediation role," it said.

In its latest World Economic Outlook report issued in April, the IMF forecast that euro area's economy will shrink 4.2 percent in 2009 and 0.4 percent in 2010.

Three important elements are weighing on the outlook, the IMF said Monday.

First of all, remaining strains in the financial system, including those emanating from the recession, are creating uncertainty.

Meanwhile, fragile confidence among consumers and businesses makes for weak demand. And structural rigidities, especially in the labor market, are threatening to turn the recession into a protracted period of slow growth, it said.

The IMF said it sought "more effective coordination of policy actions across areas and borders, including support for neighboring emerging economies," to help restore confidence in the region's economy.

Source: Xinhua