G7 leaders turn pessimistic on global economy

By Gernot Heller and Louise Egan

TOKYO (Reuters) - The crumbling U.S. housing market has wounded the world economy, and conditions may worsen as debt-laden banks clamp down on credit, finance leaders from the world's top industrialised nations said on Saturday.

While the U.S. economy was likely to escape a 2008 recession and economic fundamentals remained "solid", the Group of Seven leaders said far more work was needed to restore markets to good working order and safeguard global growth.

"The current financial turmoil is serious and persisting," U.S. Treasury Secretary Henry Paulson said as the G7 finance leaders laid out plans to treat the root causes of market distress.

"As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced."

Caution pervaded their reassurances that the United States and the rest of the world should skirt a downturn.

"There was a climate of much greater pessimism and worry than in October," said Italian Economy Minister Tommaso Padoa-Schioppa, referring to the group's previous meeting.

Indeed, where October's G7 communique spoke of a global economy in its fifth year of "robust growth", Saturday's version described a "more challenging and uncertain environment".

Finance ministers and central bankers used the statement to diagnose the risks to global growth -- a deteriorating U.S. housing market, tightening credit conditions and protracted financial market upheaval. Treatment was left for each country to take fiscal and monetary measures appropriate to their needs.