The World Bank on Wednesday sharply lowered its global economic growth forecast for 2012 to 2.5 per cent, citing European financial turmoil and weak growth prospects in emerging nations, including India.

The multilateral agency had earlier projected that the world economy would expand by 3.6 per cent this year.

In its biennial report, 'Global Economic Prospects', the multilateral agency slashed the growth forecast for high income and developing countries this year and in 2013.

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"The global economy is now expected to expand 2.5 per cent and 3.1 per cent in 2012 and 2013 (3.4 per cent and 4 per cent when calculated using purchasing power parity weights), versus the 3.6 per cent projected in June (2011) for both years," the report said.

According to the World Bank, the world economy has entered a 'dangerous period' and some of the financial turmoil in Europe has spread to developing and other high income countries, which until earlier had been unaffected.

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It said this contagion has pushed up borrowing costs in many parts of the world, and pushed down stock markets, while capital flows to developing countries have fallen sharply.

"Europe appears to have entered a recession. At the same time, growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey) is significantly slower than it was earlier in the recovery, mainly reflecting policy tightening initiated in late 2010 and early 2011 in order to combat rising inflationary pressures," the report said.

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"As a result, and despite a strengthening of activity in the United States and Japan, global growth and world trade have slowed sharply," the World Bank said.

The multilateral agency also revised its projections for growth in high income and developing countries downward for 2012 and 2013.

"High income country growth is now expected to come in at 1.4 per cent in 2012 (-0.3 per cent for euro area countries, and 2.1 per cent for the remainder) and 2 per cent in 2013, versus a June forecast of 2.7 per cent and 2.6 per cent for 2012 and 2013, respectively," it said.

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The report further added: "Developing country growth has been revised down to 5.4 per cent and 6 per cent versus 6.2 per cent and 6.3 per cent in June."

Global trade is projected to grow by only 4.7 per cent this year, compared to 6.6 per cent in 2011.

However, trade is likely to bounce back in 2013 with an annual growth of 6.8 per cent.

The fall in trade is on account of a reduction in trade financing by banks.

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The report said in the event of a major crisis, the global downturn might last longer than the 2008-09 slowdown as high income countries do not have the fiscal or monetary resources to bail out the banking system or stimulate demand to the same extent as four years back.

"Although developing countries have some manoeuvrability on the monetary side, they could be forced to pro-cyclically cut spending -- especially if financing for fiscal deficits dries up," the World Bank said.

It also said that developing countries are more vulnerable now than they were in 2008.

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According to the report, even though fiscal conditions in developing countries are better than in high income countries, government balances have deteriorated by 2 per cent or more of the GDP in almost 44 per cent of developing countries.

". . . and some 27 developing countries have government deficits of 5 or more per cent of GDP in 2012.

"As a result, developing countries have much less fiscal space available to respond to a new crisis," it said.