* Economic crisis dire, risk of unrest and war – IMF

* Recovery depends on cleaning up bank balance sheets

GENEVA, March 23 (Reuters) – The world is in a dire economic
crisis, but no recovery is possible until the financial sector
is cleaned up, the head of the International Monetary Fund said
on Monday.

The crisis will push millions into poverty and unemployment,
risking social unrest and even war, and urgent action is
required, IMF Managing Director Dominique Strauss-Kahn said.

"Bluntly the situation is dire," he told a meeting on the
crisis at the International Labour Organisation, a United
Nations agency representing unions, employers and governments
that studies labour issues.

Strauss-Kahn was talking less than two weeks before a summit
of the G20 leading nations on April 2 to tackle the crisis.

As the crisis spills over into developing countries,
millions of people will be pushed back into poverty and
hardship, Strauss-Kahn said.

"All this will affect dramatically unemployment and beyond
unemployment for many countries it will be at the roots of
social unrest, some threat to democracy, and may be for some
cases it can also end in war," he said.

REVERSAL

Strauss-Kahn confirmed that the IMF would shortly update its
economic forecasts to show the world economy contracting by
between 0.5 and 1.0 percent this year — the first reversal in
more than 50 years of sustained growth.

Developed countries would shrink by a post-war record of
about 3 percent, he said.

But the IMF still believed recovery was possible in 2010
provided bold policies were followed.

Firstly this involves boosting demand, but monetary policy
— moving interest rates — has reached its limits, even with
the unconventional tools central banks are using, he said.

That is why the IMF had called for governments around the
world to pump money in the economy to the tune of 2 percent of
gross domestic product, he said.

He noted that this did not mean that all countries should
provide this fiscal stimulus, as some were in too fragile a
financial position to increase spending.

But so far those countries that could afford it had pumped
in about 1.6-1.7 percent of world GDP.

"I do believe there is still some room to go further in some
countries, but taking it all round its not that bad,"
Strauss-Kahn said, adding this showed that international
coordination was working well.

But the prerequisite for success was the restoration of a
healthy financial sector, he said.

Although bailing out banks was politically unpopular,
businesses and households could not survive without a working
banking system, he said.

The IMFs experience of 122 banking crises around the world
had taught it that economic recovery was impossible until banks
were cleaned up, whether this was done quickly or slowly.

"You can put in as much stimulus as you want. It will just
melt in the sun as snow if at the same time you are not able to
have a generally smaller financial sector than before but a
healthy financial sector at work," he said.

Despite the need for many countries to run huge deficits,
emerging countries must not ignore the importance of rebuilding
confidence in order to attract private capital in a globalised
world, he said.