Instability in international financial, currency and commodity prices are contributing to a gloomy outlook for the world economy, the United Nations Conference on Trade and Development (UNCTAD) warned in a report yesterday.

The ongoing global financial crisis and the possibility of tighter monetary policies in some major developed countries presage major difficulties for the world economy for the remainder of 2008 and in 2009, warned the annual trade and development report.

The report expects world economy to grow by around 3 percent in2008, almost 1 percentage point less than in 2007.

In the developed countries GDP growth is likely to be around 1.5 percent. The short-term outlook is better for the developing world, where growth could exceed 6 percent, as a result of the relatively stable dynamics of domestic demand in a number of large developing economies.

But fallout from the recession in the developed world and overly restrictive monetary policies in countries with high headline inflation could well lead to a further deceleration of growth in developing countries, it warned.

According to the report, central banks of major developed countries should not further raise interest rates, as the risk of galloping inflation as a result of higher primary commodity prices has been considerably overestimated.

"In the current fragile condition of the global economy, measures to tighten monetary policy would exacerbate the global slowdown," said Supachai Panitchpakdi, UNCTAD's secretary general.

The report also urged governments to take new measures aimed at achieving greater commodity price stability.

It also recommends quick-response instruments to mitigate the impact of sharp commodity price fluctuations.

Stricter regulatory measures that help contain speculation on commodity markets could be one important step, since commodity market speculation typically exacerbates price trends originating from changes in fundamentals," it said.

The report also advised developing countries to promote diversification and industrial development in order to reduce vulnerability to commodity price shocks.

Such a transition requires higher investment in new productive capacities -- the ability to manufacture more varied and sophisticated goods -- and in the infrastructure, it said.