BY SHEN HONG IN SHANGHAI AND BOB DAVIS IN BEIJING

China should be prepared to sharply stimulate its economy if Europe's growth falls more than anticipated, the International Monetary Fund said, adding to expectations that Beijing could turn to spending if conditions significantly worsen.

In its China economic outlook report released on Monday, the IMF urged China to run a deficit of 2% of GDP rather than looking to reduce the country's deficit as planned, given the uncertainty in the global economy.

If Europe's problems turned out to be worse than expected, China should hit the fiscal gas pedal harder. In that case, "China should respond with a significant fiscal ...