It is the closest the IMF has come to recommending that governments be prepared to step in beyond current measures that central banks are using to add liquidity to ease stressed credit markets.

However, IMF First Deputy Managing Director John Lipsky, maintained he was not advocating a bailout.

“We must keep all options on the table, including the potential use of public funds to safeguard the financial system,” Lipsky said in a speech to the Peterson Institute for International Economics in Washington.

“While I am not advocating the use of taxpayer funds for individual banks, I fully recognize an appropriate role for public sector intervention after market solutions have been exhausted.”

The IMF also stood ready to use its funds, if needed, to help countries cushion the blow but for now was working with other global institutions, such as the Financial Stability Forum, to develop measures to repair the financial system.

Asked later to elaborate on the use of public funds, Lipsky said: “The idea may be appropriate to think in terms of more direct support for the global financial system in a way that would be effective and consistent.”

The Federal Reserve and four other central banks Tuesday vowed to pump fresh funds into cash-starved credit markets. Tightening credit conditions, sparked by the U.S. subprime mortgage housing meltdown, have threatened the global economy.

The Fed expanded its securities lending program Tuesday by offering up to US$200 billion of highly liquid U.S. Treasuries to primary dealers and widening the types of securities that can be used as collateral for the loans. Effectively, it allows banks to exchange unwanted mortgage notes for easy-to-sell government securities.

After seven months of credit turmoil, Lipsky said there was little doubt that risks could escalate and decisive policy action was needed.

The first priority, he said, was to restore the normal functioning of financial markets and steps are needed to make sure banks are adequately capitalized while also increasing their transparency.

“Even as these financial sector policies take hold, the global economy — and advanced economies in particular — will continue to face pressures from tightening credit conditions,” he said. “If so, there is likely to be a role in some countries for stepped-up counter-cyclical macroeconomic policy measures to help support demand.”

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