Warning thatsignificant challenges to restoring financial stability remain despite an unprecedentedpolicy response to the global economic crisis, the International Monetary Fund(IMF) has called for "continued decisive and effective action" toreinforce signs of market recovery.

Measures including the recent expansion of resources for internationalinstitutions and IMF's enhanced lending framework are gradually beginning torestore market confidence, but the challenges to restoring financial stabilityremain significant, it said in the Global Financial Stability Report (GFSR)released Tuesday.

In particular, emerging market risks have risen the most in the past sixmonths, the report said. The credit deterioration is taking an increasing tollon bank balance sheets, with the IMF emphasising the need to cleanse them ofimpaired assets.

As institutions reduce assets during a period of deleveraging, internationalcapital flows to emerging markets have been curtailed, it said noting "theeffects have been harsh in some cases.

On balance, emerging markets could experience net outflows of private capitalin 2009, with but slim chances of recovery in 2010 and 2011. Banks in countrieswhich were dependent on such cross border flows have suffered greatly, but theeffects are also being felt by companies in many emerging market, the reportsaid.

Within emerging markets, eastern European economies have been the hardest hit.The linkages between western Europe and emerging European banking systems makethe region particularly vulnerable.

"The global response to date has been rapid, but often piecemeal andinsufficient to bolster public confidence," the IMF said. "Inparticular, the global banking system needs to be cleansed of its impairedassets."

"Overall, further decisive and effective policy actions will be needed tostabilise the international financial system," it said.