Despite the global financial stability has improved in recent months,? fragilities remain with funding of banks and sovereigns in Europe top the key challenges in near future, the International Monetary Fund (IMF) said in its semiannual Global Financial Stability Report.

"Global financial stability has improved over the past six months, bolstered by better macroeconomic performance and continued accommodative macroeconomic policies, but fragilities remain," the?report said .

"In the next few months, the most pressing challenge is the funding of banks and sovereigns, particularly in some vulnerable euro area countries," noted the report.

The report is part of the one-week-long programs of the IMF and World Bank Spring Meetings.

The 187-member international lender said that the two-speed recovery -- modest in advanced economies and robust in emerging market economies -- has posed different policy challenges for each nation.

In advanced economies hit hardest by the crisis, governments and households remain heavily indebted and the health of financial institutions has not recovered in tandem with the overall economy, the report said.

It suggested that policymakers in advanced economies need to shift the balance of policies away from reliance on macroeconomic and liquidity support to more structural policies -- less " leaning" and more "cleaning" of the financial system.

This will entail reducing leverage and restoring market discipline, while avoiding financial or economic disruption during the transition. Thus, ongoing policy efforts to withdraw public guarantees and ensure bondholder liability for future losses must build on more rapid progress toward stronger bank balance sheets, ensuring medium-term fiscal sustainability and addressing excessive debt burdens in the private sector.

For some of the Eurozone countries, which have been suffering the sovereign debt crisis, the Fund suggested the continuation of fiscal consolidation process.

The report pointed out that policies aimed at fiscal consolidation and strengthening bank balance sheets in these countries should be supported by credible assurances that multilateral backstops are sufficiently flexible and endowed to facilitate an orderly deleveraging without triggering further fiscal or bank funding strains.

In other countries, funding is less problematic, but still a concern. Under a baseline scenario, higher funding costs and a rising government debt stock will cause government interest payments to increase in most advanced economies.

For the United States and Japan, the two countries that still have some fiscal space, the Fund urged them to cut deficit as soon as possible.

"Much greater progress on medium-term fiscal consolidation strategies will be needed in both the United States and Japan to avoid downside risks to financial stability and to preserve confidence," it said.

Overall, despite the transfer of risks from the private to the public sector during the crisis, "confidence in the banking systems of many advanced economies has not been restored and continues to interact adversely with the sovereign risks in the euro area," said the IMF.

For policymakers in emerging market economies, the Fund suggests limitation of overheating and a buildup of vulnerabilities to avoid "cleaning" later.

"Emerging market economies have continued to benefit from strong growth relative to that in advanced economies, accompanied by increasing portfolio capital inflows," noted the report. "This is putting pressure on some financial markets, contributing to higher leverage, potential asset price bubbles, and inflationary pressures."

It said that policymakers will have to pay increasing attention to containing the buildup of macrofinancial risks to avoid future problems that could inhibit their growth and damage financial stability.

Emerging market economies are facing new challenges associated with strong domestic demand, rapid credit growth, relatively accommodative macroeconomic policies, and large capital inflows, the report said.

The IMF also noted that geopolitical risks could also threaten the economic and financial outlook, with oil prices?skyrocketing amid fears of supply disruptions in Arab countries.