WASHINGTON (Reuters) - The International Monetary Fund said on Tuesday that turmoil in credit markets could spread with losses possibly approaching $1 trillion, and cautioned that risks to global economic growth had increased.

In its twice-yearly assessment of global financial markets, the IMF said there had been a “collective failure” to grasp the extent of leverage in the financial system and the risk that it could be unwound in a disorderly fashion. Conditions may get worse as the limping U.S. economy leads to more credit losses.

“The credit shock emanating from the U.S. subprime crisis is set to broaden amid a significant economic slowdown,” Jaime Caruana, director of the IMF’s monetary and capital markets department, said at a news conference.

“The deterioration in credit has moved up and across the credit spectrum to prime residential and commercial mortgage markets, and to corporate credit markets. As the credit cycle turns, default rates are likely to rise across the board.”

The fund estimated that write-downs and losses could conceivably reach $945 billion, but stressed that its calculations reflected market conditions in March, and the situation had improved somewhat since then. Still, officials declined to comment on whether financial markets were overestimating potential losses.

Caruana said a key concern now was how credit conditions would fare in a U.S. economic downturn, which is likely to increase delinquencies on a variety of loans.

He said the current crisis, which traces its roots to defaults in the U.S. subprime mortgage market but spread to other forms of credit with astonishing speed, was not simply a matter of over-exuberant markets that needed correction. The turmoil had exposed “fault lines” beneath the markets that needed serious repair.

That will require the attention of the private sector, central banks and perhaps the use of public funds, Caruana said, adding that governments should be “open” to all options.

“Get ready for early intervention, for early action,” he said.

The IMF said threats to global financial stability had risen and the potential for spillovers to emerging markets increased through funding channels and trade.

“Downside macroeconomic risks that are concentrated in the U.S. economy have a significant impact on systemically important financial institutions that may spill over to global markets,” it said in its report.

“Our analysis indicated that a contraction in the supply of private sector credit and market borrowings could bring a significant slowdown in U.S. output growth in the following several quarters,” the IMF said in its Global Financial Stability Report.

The IMF also warned that signs of a downturn are becoming evident in some European housing markets, and said if economic growth slows in Europe, as forecast by the IMF, repossessions and write-offs will rise.

It noted that some analysts foresee a near doubling of home repossessions in Britain.