By Ian Talley

Of Dow Jones NEWSWIRES

WASHINGTON -(Dow Jones)- The International Monetary Fund's policy board warned against budget cuts in Europe and other rich nations that would starve the growth vital to erasing their massive debt obligations, a senior IMF official said Saturday.

"Everything that we do should be supportive of medium term fiscal consolidation, particularly in advanced economies," said Tharman Shanmugaratnam, chairman of the IMF's policy-steering committee, after a meeting of the fund's key finance ministers.

The chairman said there was broad consensus on the International Monetary and Financial Committee that it is "critical" for as many advanced economies as possible to return to normal growth levels within two to three years.

"If we don't get (gross domestic product) back to its potential levels, then fiscal sustainability is not possible either," he said.

IMF Managing Director Christine Lagarde and other senior fund officials this week warned against further near-term deficit cuts in Spain and Italy beyond what has already been announced. Instead, the governments need to build credibility with markets by implementing proposed plans with discipline and outlining tough deficit cuts over the medium term. Additionally, the U.S. has cautioned against a knee-jerk reaction to a potential deterioration in the euro zone that sought more deficit cuts. That, the U.S. warns, could create a downward spiral of austerity and recession.

In the IMF's official communique, the fund's governing board highlighted that monetary policy needed to remain accommodative to encourage growth.

The IMF board dropped a phrase in from an earlier draft communique seen by Dow Jones Newswires that said central banks needed to prepare to exit expansive and extraordinary monetary policies. In a more neutral phrase, the IMF said in its official statement that easy monetary policy should remain only as long as "inflation prospects remained anchored and weak growth persists."

The European Central Bank has been more hawkish than the IMF would like, expressing concern over the risk of spurring inflation to unhealthy levels.

But IMF Chief Economist Olivier Blanchard said earlier in the week that ECB monetary policy should be more focused on spurring growth in the weaker parts of the euro zone than fueling inflation in Germany. In the fund's World Economic Outlook published Tuesday, the IMF said inflation pressures are easing around the globe.

"The ECB has some room to further lower the policy rate, given that inflation is projected to fall appreciably below the ECB's ... target," the IMF said.

-By Ian Talley, Dow Jones Newswires; 202-631-5794; ian.talley@dowjones.com