Washington: Providing ammunition to President Barack Obama in his battle with congressional Republicans, the International Monetary Fund (IMF) has urged US to quickly raise its federal debt ceiling.

In its annual report on the world's largest economy, the Washington-based agency warned of a "severe shock" to the US economy and global financial markets unless the debt limit is raised soon.

"The federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets," it said.

The IMF said that downside risks to the US economy outlook have increased, citing continued housing market weakness, unfavorable fiscal outcomes, and further shocks over commodity prices and tight credit supply conditions.

"These could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on consolidation does not materialise or the debt ceiling is not raised soon enough," it said.

"These risks would also have significant global repercussions, given the central role of US Treasury bonds in world financial markets."

The IMF forecasted that the US economy will grow 2.5 per cent this year, down from 2.9 per cent in 2010.

Obama has been struggling to reach a deal with Republican lawmakers to raise the amount the government can borrow to help finance its operations.

The US reached its USD 14.3 trillion borrowing limit in May. The US government will default on its debt if it doesn't raise the limit by the August 2 deadline.

(Agencies)