The International Monetary Fund said central banks in Europe should keep interest rates low and possibly extend non-standard stimulus measures because the region’s economic recovery is likely to be “slow and fragile.”

“Monetary policy will need to remain supportive for the time being and keep all options open,” the IMF said in its economic outlook for Europe published in Istanbul today. “In the advanced economies, there might still be additional room for maneuver through a more forceful signal of the intent to keep interest rates low and the extension of non-standard measures.”

Central banks in the U.K., euro area, Scandinavia and eastern Europe have cut interest rates to record lows and used other measures to encourage lending and fight the worst economic crisis since World War II. The Bank of England has lowered its key rate to 0.5 percent and is buying government bonds to reflate its economy, while the ECB is lending banks as much cash as they want at its record-low benchmark rate of 1 percent.  The policies are not without risks and central banks “should thus plan to exit as soon as the recovery takes hold,” the IMF said.

Still, the recovery will likely be slow because increasing demand for European goods in Asia “can hardly substitute for the pre-crisis appetite for imports of U.S. consumers,” said Marek Belka, director of the IMF’s European department.

“In addition, credit remains scarce, unemployment is rising, and the crisis has reduced Europe’s growth potential,” he said in the report.  Recovery Forecast  The IMF forecasts that the U.K. economy will shrink 4.4 percent this year before growing 0.9 percent in 2010.

The economy of the 16 euro nations will contract by 4.2 percent in 2009 and expand 0.3 percent in 2010. Europe’s bloc of emerging nations, such as Poland and Hungary, will see gross domestic product shrink 6.6 percent in 2009 before growth of 1.7 percent next year, according to the fund.

While the crisis has hampered Europe’s medium-term growth outlook, potential growth should return to its historic trend in most of Europe’s advanced economies, the IMF said. For the euro region, potential growth of about 2 percent or above “should be achievable” over the long term, according to the report.

By contrast, “where extraordinary financial sector profits might have exaggerated growth over the past years, as for example in the U.K., long-term growth may only recover to levels somewhat below the average growth rates experienced in recent years,” the fund said.