The US economy is now slowing fast and "is likely to contract in the current quarter and into early 2009," said the IMF in its latest World Economic Outlook report.

The world's largest economy rose 2.8 percent at an annualized rate in the second quarter. Taking the most recent three quarters together, however, the pace of growth averaged only 1.25 percent, well below potential.

More importantly, available data for the July-September period suggest a further slowdown and forward-looking indicators -- such as consumer and business confidence and accumulating evidence of the negative impact on credit of recent financial market disruptions -- suggest that a recession is likely to happen, according to the IMF.

The IMF now projects that the US economy will decline in the final quarter of this year and the first quarter of 2009, stabilize in the second quarter, and then embark on a gradual recovery.

On a year-over-year basis, growth is moderating from 2.0 percent in 2007 to 1.6 percent in 2008 and 0.1 percent in 2009.

The economy will only return to potential growth in 2010, the IMF said, adding that "risks around this forecast are to the downside."

It said that particular concerns are that the credit crunch could impose an ever-greater constraint on activity, that the house price correction could extend into 2010, and that inflation pressures may prove more persistent, limiting the Federal Reserve's room for maneuver.

"With a recession now looking increasingly likely, the key questions are, how deep will the downturn be, when will a recovery get under way, and how strong will it be?" the IMF said.

The key determinants of the short-term outlook will be the effectiveness of recent government initiatives to stabilize financial market conditions, as well as the behavior of US households in the face of rising stress, the depth of the housing cycle, and the extent to which inflation concerns constrain monetary policy, according to the IMF.

The semiannual World Economic Outlook report came a few days before the IMF and its sister institution World Bank hold their annual meeting in Washington on Oct. 13.