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There could be "severe regional and global damage" if the UK were to leave the European Union, the International Monetary Fund (IMF) has warned.

The organisation said a Brexit would create "major challenges" for the UK and the rest of the EU, particularly in terms of trade relationships.

The IMF said the looming referendum has already affected confidence among investors, and expects that to worsen in the event of a 'leave' vote.

The exit negotiations alone "could weigh heavily on confidence and investment, all the while increasing financial market volatility", the Fund added. The IMF also believes a Brexit would "disrupt and reduce mutual trade and financial flows".

Maurice Obstfeld, the IMF's economic counsellor, said: “In the United Kingdom, the planned June referendum on European Union membership has already created uncertainty for investors; a ‘Brexit’ could do severe regional and global damage by disrupting established trading relationships."

Mr Obstfeld added: “Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long."

The organisation's also cut its growth forecast for the UK economy for 2016. It now expects the economy to grow by 1.9%, down from its previous forecast of 2.2%. Growth for next year remained at 2.2%.

Michael Baxter, economics blogger and co-author of iDisrupted, said: "The UK has just posted its worst ever current accounts deficit - markets may be underestimating the extent to which US interest rates may go up later this year. Sterling could come under considerable pressure if the referendum results in a Brexit vote, the combination of the vote, the current account deficit, and impending rate rises in the US may mean that the Bank of England will have no choice but to increase interest rates to avoid a crash in Sterling. This may even result in a recession towards the end of this year."

Economic risk and business support

Last month, the Bank of England warned that the effects of leaving the EU could be so significant that it could cause another credit crunch. The Bank's Financial Policy Committee said: “The financing of that deficit is reliant on continuing material inflows of portfolio and foreign direct investment. Those flows have contributed to the financing of the public sector financial deficit and corporate investment, including in commercial real estate. Heightened uncertainty could test the capacity of core funding markets at a time when the liquidity of these markets has shown signs of fragility across advanced economies.”

A week earlier, the country's biggest business lobby group, the CBI, warned that a Brexit could cost the UK economy £100 billion and see one million jobs lost.