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UPDATE 1-IMF warns U.S. about trade risks and financial vulnerabilities

Jason Lange

(Adds comment by IMF official)

WASHINGTON, June 6 (Reuters) - The International Monetary Fund on Thursday warned the United States that escalating trade disputes or an abrupt downturn in financial markets could pose substantial risks for the U.S. economy.

The international lender, in a review of U.S. policies, said the U.S. economy was on track to grow 2.6% this year. That was quicker than the IMF's 2.3% growth forecast from April and was boosted by easy financial market conditions.

But the U.S. financial system appears increasingly vulnerable and financial conditions could tighten as investors worry more about America's trade disputes, IMF officials said.

"That is the risk we are most concerned about for the U.S. economy," Nigel Chalk, the IMF's mission chief for the United States, said at a news conference.

In its report, the IMF criticized the Trump administration's efforts to overhaul global trade relationships by raising tariffs and said it was especially important to resolve a trade dispute with China. That dispute poses a threat to the global economy, the IMF said.

Trump has hiked tariffs on billions of dollars in Chinese imports and last week threatened to raise tariffs on all Mexican imports if Mexico doesn't crack down on illegal immigration into the United States.

"Rising import tariffs and other steps taken by the administration are undermining the global trading system," the report said.

The IMF also said U.S. financial regulators haven't done enough to counter rising vulnerabilities in the financial system such as historically high corporate leverage and weakening underwriting standards. This could make a financial downturn hit the U.S. economy harder, the IMF said.

The Standard & Poor's 500 index of U.S. equity prices hit a record high in April but has fallen about 4% in the last month as investors worried that trade wars and a sagging global economy might depress the U.S. growth outlook.

"An abrupt reversal of this accommodative environment, interacting with leveraged corporate balance sheets, could create a significant downdraft to activity, investment, and job creation," the IMF said.

It criticized U.S. regulators for offering "little institutional response to counter these growing risks" and for instead easing regulatory constraints. (Reporting by Jason Lange; Editing by Andrea Ricci)