IMF chief Christine Lagarde warned Tuesday that crude oil prices may spike by up to 30 per cent if Iranian supplies were disrupted, causing "serious consequences" for the global economy.
The standoff between Iran, the world's second-largest supplier of oil, and the West over the Islamic Republic's nuclear program is seen as a flashpoint that could sharply increase world crude prices.
"Clearly it would be a shock to economies if there was a major shortage of exports of oil out of Iran, it would certainly drive up prices for a period of time," Lagarde told reporters in New Delhi, wrapping up a two-day visit.
The International Monetary Fund (IMF) has calculated that an interruption in oil supplies from Iran could increase oil prices by 20 to 30 per cent, said Lagarde, who arrived in India at the weekend from neighbouring China.
"A sudden and brutal rise in the price of oil" from Brent crude's current levels of $125 a barrel "would have serious consequences on the global economy" until other oil-exporting nations were able to bridge the gap, she added.
Iran has repeatedly rejected accusations by Western nations that it is developing an atomic bomb but the United States and the European Union have imposed stiff sanctions to persuade Tehran to abandon its nuclear programme.
Iran has threatened retaliation for tightening Western sanctions over its nuclear programme, including a possible disruption of shipping through the Strait of Hormuz, a Gulf chokepoint for global oil shipments.
Apart from concern over tensions with Iran, Lagarde said the world financial situation was not as grave as it was at the start of this year.
"We are further away from the abyss than we were three months ago," she said.
Steps by the European Central Bank and some European countries had helped stabilise the overall situation, she said, but there were still areas "that need to be attacked with vigour", such as shoring up financial institutions.
"Financial institutions were high contagion agents for this crisis -- this tells us where reforms have to focus. Financial institutions have to be agents for growth, not a threat to growth," she said.
The latest global financial crisis had been a "huge catalyst" to get European political leaders to take politically unpopular measures to restore economic health in the eurozone, she added.
"Crisis was a major agent of change but you don't want to have to go there," Lagarde said.
For emerging market giant India, she said its priorities had to be development of its dilapidated ports, airports and other infrastructure in order to remove bottlenecks to economic growth.
Lagarde, who was in India to meet with Indian leaders, also said New Delhi needed to create a "business-friendly" environment to draw vital investment and narrow its ballooning fiscal deficit.
She praised India for pursuing fiscal consolidation in its budget last week, even though many economists have said New Delhi has not done enough to curb its massive subsidy spending