The head of the World Bank said yesterday a drop in investor confidence was already feeding through to developing nations from a growing debt crisis in advanced economies and urged "co-operative action".
Robert Zoellick said stock markets in developing countries had been hit hard and capital flows had declined sharply since August, when the eurozone's debt crisis intensified.
"So far, foreign direct investment to developing countries has held up, which is good, but we need a close watch," Mr Zoellick told reporters ahead of meetings of global finance leaders in Washington this week.
"A new and larger risk looms. The drop in markets and confidence could prompt slippage in developing countries' investment and a pull-back by their consumers, too."
He said poorer countries had less fiscal space compared with 2008 to counter an economic downturn and some were "walking a monetary policy tightrope".
Developing nations and emerging markets have been engines of global growth since the devastating 2007-2009 financial crisis. Any slowdown in developing economy growth could be a further setback to an already fragile global recovery.
Mr Zoellick warned that increasing economic pressures could lead to a rise of trade protectionism pressures.
The eurozone debt crisis is now dominating the thoughts of policymakers worldwide with the United States, in particular, pushing for more dramatic action from Europe's leaders.
Questions about European officials' ability to come up with a convincing solution for tackling a sovereign debt crisis has rattled confidence and roiled financial markets.
"The world is watching and waiting for Europe, Japan and the United States to address their hard problems," Mr Zoellick said.
Finance ministers and central bankers from the Group of 20 leading nations meet on Thursday in Washington to discuss global economic developments, followed by meetings of the International Monetary Fund and World Bank that extend into the weekend. (Reuters)