By Ambrose Evans-Pritchard

LONDON, England - September 4, 2011 - The International Monetary Fund has called on the United States and Europe to abandon fiscal austerity and switch to stimulus measures, warning that the global economy faces a "threatening downward spiral".

Christine Lagarde, the IMF's managing-director, said the outlook had darkened suddenly over the summer.

"There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken," she said.

"The spectrum of policies available is narrower because a lot of ammunition was used in 2009. But if governments, institutions and central banks work together, we'll avoid recession," she told Der Spiegel.

The comments come at the start of a dramatic week for the eurozone as Italy prepares to roll over record sums of debt and Germany's constitutional court issues its long-awaited verdict on the legality of the EU's bailout machinery.

Markets are already tense after the EU-IMF “Troika” withdrew abruptly from Athens on Friday, accusing the Greek government of failing to comply with rescue terms.

The Italian treasury must redeem 14.6 billion euros of debts this week and 62 billion euros by the end of September, the most ever in a single month.

"We are experiencing very demanding times," Jean-Claude Trichet, the European Central Bank's president, said over the weekend. The ECB has stabilized Italy's debt over the last four weeks, capping yields on 10-year bond yields near 5% through purchases on the secondary market.

It is unclear how much longer the ECB can keep doing this after a string of top officials in Germany described the bank's actions as illegal.

"The ECB cannot substitute for governments," said Trichet. He was speaking at the Ambrosetti Workshop at Lake Como, where he held a closed-door meeting to discuss the euro crisis with Bank of England Governor Sir Mervyn King.