Mr Lee said Singapore and Asian countries cannot avoid the impact of weakening US, European and Japanese economies.

Speaking amid a worldwide stock rout and growing fears that the global economy is shifting towards recession, PM told the Pravasi Bharatiya Divas (PBD) or Global Indian Diaspora Conference on Friday that the financial problems facing the US and Europe are 'complex and grave'.

'They will not be solved overnight, or even within a few months. The fear and panic gripping financial markets everywhere will take time to subside,' he said.

'The trust and confidence between banks, which lie at the heart of finance intermediation, will take time to restore. The crisis in the financial system will dampen consumption and investment in the developed countries and affect growth all over the world.'

While Asian banks have been lucky to have avoided the problems afflicting US and European banks, they have been hit by the Wall Street debacle because of globalisation.

'We must prepare for a rough ride at least over the next year, and quite possibly longer,' he cautioned.

But amid the gloomy outlook, Mr Lee said even as the Singapore economy slows down, its financial system is sound, and the economy remains competitive.

He explained: 'Over the last few years, when conditions were good, we had pressed on with upgrading and diversifying our economy. This will mean new and better jobs, even if some old ones are lost.

'The momentum from projects that we have secured will help to see us through this storm.'

He added that Singapore's strategy of growing with Asia also remains valid, and he is confident that Asia's dynamism will endure.

Both India and China are continuing to transform their economies, and their emergence in a stable and peaceful region will benefit many other Asian countries, said Mr Lee.

On the focus of the conference, PM Lee spoke on the importance of the Indian diaspora in linking up with India and Singapore's role in strengthening ties with this group.

He said: 'Just as Singapore has cultivated ties with India, we also wish to network with Indian overseas communities throughout the Asia-Pacific.'

He announced moves to 'develop Singapore as a centre for networking and scholarship on the Indian diaspora.'

This includes plans to 'set up an Indian Heritage Centre, which will trace the history of the Indian diaspora in Singapore and how the Indian community has contributed to Singapore's development'.