Christine Lagarde, the managing director of the International Monetary Fund, warned that the global economy is entering a "dangerous new phase" on Friday, ahead of the G7 summit in Marseilles, France.
French finance minister Christine Lagarde is seen as a front-runner to succeed Strauss-Kahn.
She warned that both advanced and emerging economies faced key economic challenges, and that governments must "act now" to stop further contagion.
"Policymakers should stand ready, as needed, to take more action to support the recovery, including through unconventional measures," Lagarde said.
"The world is collectively suffering from a crisis of confidence, in the face of a deteriorating economic outlook and rising concerns about the health of sovereigns and banks."
Her speech at Chatham House in London came after a turbulent week for the markets, with the focus on sovereign debt issues in the euro [EUR=X 1.3651 
-0.023 (-1.66%) 
] zone and job creation in the US.
She welcomed President Obama's new $450 billion jobs package, announced Thursday, but added "it remains critical for the United States to clarify its medium term plan."
The British government, including Chancellor of the Exchequer George Osborne, who also spoke, was warned that "risk levels are rising" in the UK and the government needs to have a "heightened readiness to respond."
However, Lagarde conceded that the government's response "remains appropriate."
When Lagarde called for the recapitalization of European banks at the Jackson Hole summit in the United States in August, a flight away from European banks resulted in the markets.
Osborne agreed that the situation is "more complex" than in 2008 but described his government's plan as a "rock of stability".
"The underlying cause is the same – excessive levels of debt," he said.
He backed Tim Geithner, the US Treasury Secretary, who wrote in the Financial Times on Friday that the three most important elements for boosting growth are: strengthening growth in the US, stronger actions in Europe to halt the debt crisis and emerging markets like China allowing their currencies to adjust to market forces.
One of the factors weighing down markets is the perception that the situation is worse than 2008, and that there are fewer policy options available to governments and central banks.
Osborne warned that "nothing would be more damaging" to the British economy than an increase in interest rates.
The Bank of England Thursday held its interest rate unchanged at 0.5 percent, a historic low, which has now been in place for two and a half years.
He also supported greater fiscal and institutional integration in the euro zone.
This stance is fast becoming popular, although there has not been any clear signal as to what greater integration would involve.
Stephen King, chief economist at HSBC, told CNBC.com after the speech on Friday that he believed a "fiscal club" would work for the euro zone.
"Countries that don't stick to the guidelines would have their memberships suspended, and if a country chooses not to sign up, it won't get the benefits other countries do and will be pushed to the edge of the euro zone," he said.
"It will not be a proper member of the euro zone."
"As time goes by, there's a danger of getting worse rather than better."
Friday's G7 meeting will include discussions on the risks facing the economy at the moment.
The changing landscape in the Middle East and North Africa following the Arab Spring, and how more advanced economies can help the countries which are transforming their governments, will also be on the agenda.
© 2011 CNBC.com
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CAIRO — A demonstration that brought tens of thousands to this city’s central Tahrir Square turned violent on Friday, when thousands of people — led by a heavy contingent of soccer fans — tore down a protective wall around the Israeli Embassy, while others defaced the headquarters of the Egyptian Interior Ministry.
Egyptian protesters dismantled a concrete wall which was in front of the Israeli embassy in Cairo.
About 200 people were injured in clashes with the police at the Israeli Embassy and 31 were injured near the Interior Ministry, the Ministry of Health said late Friday night. Protesters scaled the walls of the Israeli Embassy to tear down its flag, broke into offices and tossed binders of documents into the streets.
Mustafa el Sayed, 28, said he had been among about 20 protesters who broke into the embassy. He showed a reporter video from a cellphone, of protesters rummaging through papers and ransacking an office, and he said they had briefly beaten up an Israeli employee they found inside, before Egyptian soldiers stopped them. The soldiers removed the protesters from the building, he said, but let them go free.
By 11:30 p.m., about 50 trucks had arrived with Egyptian riot police officers, who filled the surrounding streets with tear gas. Witnesses said that protesters had set a kiosk on fire in front of a security building near the embassy, and that the police had fired rubber bullets to disperse the crowd from both buildings. But at 3 a.m. Saturday, thousands of protesters were still battling thousands of riot police officers. Demonstrators threw rocks and gasoline bombs at the officers, sometimes forcing them to retreat, and the police fired back with tear gas. To celebrate an advance, protesters set off the flares that they typically use to cheer at soccer matches.
Egyptian airport officials said early Saturday that the Israeli ambassador was waiting for a military plane to leave the country, The Associated Press reported.
United States officials said Defense Minister Ehud Barak of Israel had called Defense Secretary Leon Panetta, who in turn asked the Egyptian military to try to restore order at the embassy.
In addition, a fire broke out in the basement of the Interior Ministry, but it appeared to have been started from the inside and not by the protesters surrounding the building. The fire was in a room believed to store criminal records.
The scale of the protests and the damage inflicted represented a departure from the previously peaceful character of the demonstrations staged periodically in Tahrir Square since the revolution in January and February.
Organizers of Friday’s demonstrations had said they would call for a list of familiar liberal goals, like retribution against former President Hosni Mubarak and an end to military trials of civilians. But thousands of people marched off from the square to express their anger over disparate recent events, including a recent dispute along the border with Israel and a brawl between soccer fans and the police at a match on Tuesday.
Thousands of hard-core soccer fans — known here as ultras — were for the first time a conspicuous presence in the protests and a dominant force in the violence. They led the attacks on the Interior Ministry and the security building near the Israeli Embassy, and they kept up the fight outside the embassy long after others had gone home. At the Interior Ministry, political activists tried to form human barriers to protect the building, urging protesters to retreat to the square and chanting, “Peacefully, peacefully.”
“Those who love Egypt should not destroy it!” they chanted.
The embassy, which has been the site of several previous demonstrations after the Israeli armed forces accidentally killed at least three Egyptian officers while chasing Palestinian militants near the border last month, was an early target on Friday. In response to almost daily protests since the shootings, the Egyptian authorities had built a concrete wall surrounding the embassy, and by early afternoon thousands of protesters, some equipped with hammers, were marching toward the building to try to tear down the wall.
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