April 11 (Bloomberg) -- The International Monetary Fund cut its forecast for U.S. economic growth in 2007 to 2.2 percent, the slowest expansion in five years, on a weakening housing market.

The forecast for the world's largest economy compares with a September estimate of 2.9 percent, the IMF said in its twice- annual World Economic Outlook released today in Washington. The U.S. economy grew 3.3 percent in 2006.

Home construction has slumped as builders try to trim a glut of unsold properties that's reached a 15-year high, the IMF said. Still, homebuilding will be more a drag than an anchor as a ``robust'' labor market and high corporate profits spark a rebound in growth next year to 2.8 percent, the fund also said.

``A growth pause still seems more likely at this stage than a recession,'' the IMF report said. ``The expansion is expected to gradually regain momentum, with quarterly growth rates rising during the course of 2007.''

U.S. stocks declined on the report and extended their losses after minutes of the Federal Reserve's last policy meeting showed officials agreed higher interest rates may be needed to curb inflation.

The Dow Jones Industrial Average retreated 85.41, or 0.7 percent, to 12,488.44 as of 2:04 p.m. in New York. The Standard & Poor's 500 Index slid 0.6 percent to 1440.47, snapping a six- day advance.

The fund left its forecast for global growth this year unchanged at 4.9 percent, even as it cut U.S. estimates. It would be the first time in four decades that the world economy powers ahead with little help from its biggest participant.

Group of Seven

The downgrade means the U.S. probably will not lead the Group of Seven nations in growth for the first time since 2003, ranking fourth behind the U.K., Canada and Japan, according to the IMF. The U.S. hasn't trailed Japan, which struggled with falling prices for much of the past decade, since 1991.

This year will also mark the first time since 2001 in which European economic growth is faster than the U.S., according to the IMF forecast. The economy of the 13 nations using the euro will grow 2.3 percent this year, the IMF estimates. The lender increased its forecast for Europe from 2 percent.

The IMF is a bit more pessimistic than economists surveyed by Bloomberg News. The median estimate of 73 economists polled this month fell to 2.4 percent from 2.5 percent in March.

Most Americans are more concerned about the economic outlook. Six in 10 people in a new Bloomberg/Los Angeles Times poll predicted a recession within a year. The survey, taken April 5-9, also showed 58 percent disapprove President George W. Bush's handling of the economy, his worst showing in 8 months.

Home Sales

Home sales dropped 9.7 percent last year, the most since 1982, and residential construction in the fourth quarter suffered the biggest decline since 1991.

Troubles in the subprime mortgage market may make matters worse. The percentage of subprime borrowers, those with poor or limited credit histories, with late payments reached a four-year high of 13.3 percent in the fourth quarter, according to the Washington-based Mortgage Bankers Association.

There is a chance the troubles in the subprime market will spread, hurting lenders' profits and leading to more restrictions on credit and an increase in foreclosures, the fund said. The fund pointed to an ``excessive relaxation'' in lending standards as a cause of the current problems.

The IMF also said sluggish business investment contributed to weaker growth. Corporate spending on new equipment dropped at an annual pace of 4.8 percent in the fourth quarter, the most in four years.

Consumer Spending

While the $13 trillion U.S. economy likely can withstand losses in construction and business spending, a deeper decline in home prices may also sap consumer spending, the IMF said.

``The balance of risks to this less buoyant outlook remains to the downside,'' the report said.

More likely, the worst of the housing decline is over, and strong corporate profits will encourage businesses to resume spending, the IMF said, noting that interest rates remain low by historical standards.

The fund said the Federal Reserve's policy of holding interest rates steady was ``appropriate'' for now. Any future interest rate moves should be based on how incoming data affects the perceived balance between growth and inflation, it said.

Minutes of the Federal Open Market Committee's March 20-21 meeting, released today, showed that officials agreed higher interest rates could still ``prove necessary'' to control inflation even as they removed a reference in their statement to tighter credit because of increased economic risks.

`Increased Uncertainty'

``Further policy firming might prove necessary to foster lower inflation,'' according to the minutes. ``But in light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming.''

A low unemployment rate should offset the damage to consumer confidence from any drop in home prices, the IMF report said. The jobless rate fell to 4.4 percent in March, matching a five-year low, the Labor Department reported last week.

The U.S. economy might also get a lift from an increase in exports, spurred by stronger economic growth abroad and a weaker dollar, the report said.

``On the upside of the central forecast, the depreciation of the dollar could provide a stronger spurt to exports than projected,'' the fund said.

The dollar fell to a two-year low of $1.3442 against the euro on April 5, within 2 percent of the record low of $1.3666 set on Dec. 30, 2004. The dollar has lost ground against the euro in four of the past five years.

To contact the reporter on this story: Kevin Carmichael in Washington at kcarmichael@bloomberg.net.

Last Updated: April 11, 2007 14:24 EDT