Failed auctions in the municipal bond market and subprime mortgage woes that have slammed bond insurers also could raise borrowing costs between banks next week, hurting business activities, JPMorgan said in a report on Monday.

AIG, the world's largest insurer, said that 'material weakness' in valuing a credit derivatives portfolio had triggered auditor questions over its accounting. That sent its shares down nearly 12 per cent, the biggest drop for AIG since October 1987.

AIG's disclosure means it may face further losses on US mortgages it insures or invests in, despite its past assurances that it did not have major problems from the credit crisis that has gripped global markets since last year.

A group of central bankers and regulators said over the weekend that more upheaval may lie ahead.

'It is likely that we face a prolonged adjustment, which could be difficult,' the Financial Stability Forum said in an interim report to the G7 ministers, who met in Tokyo over the weekend.

'As institutions adjust to these conditions, the potential exists that risk-shedding could tighten credit constraints on a widening set of borrowers and thereby slow economic growth, which could further impair credit,' said the report issued on Saturday.

Finance leaders from Europe and Asia suggested that economic slowdown in the United States will continue to choke global growth.

'The problem is today we have unknown unknowns,' IMF Managing Director Dominique Strauss-Kahn said on Monday. 'For the US at least, the slowdown will be both significant and will last for some time.'

'There is no way to escape a rather long period of slowdown in economic growth,' Mr Strauss-Kahn said in Mumbai during a visit to India.

The IMF lowered its global 2008 growth projection to 4.1 per cent from 4.4 per cent, reflecting a slowdown from the 4.9 per cent pace achieved last year, due to weakening US and European growth outlooks.

Finance leaders from the G7 industrialised nations - the United States, Japan, Germany, Britain, France, Italy and Canada - also discussed collective action to calm markets.

Eurogroup Chairman Jean-Claude Juncker, who chairs the Eurogroup - the monthly meetings of euro zone finance ministers and the European Central Bank - told the Luxemburger Wort newspaper that turbulence in financial markets could continue for months.

'We are not yet at the end of the market crisis,' Mr Juncker told the paper.

'We have agreed in Tokyo that if there are irrational price movements in the markets, we will collectively take suitable measures to calm the financial markets,' he said, without specifying the measures.

Finance ministers and central bankers from the G7 said on Saturday that financial market turmoil was serious and persisting. -- REUTERS