Economies in the Middle East and Central Asia are set to remain strong, but a worsening of the security situation could severely dent growth, an International Monetary Fund report said Sunday.

The report said growth across the region is outpacing the global economy, but cautioned that a worsening of Iraq's "security problems" for example would likely have a negative impact on neighboring countries and their economies.

"Economic performance in the Middle East and Central Asia region remains strong, despite security problems in some countries and recent asset price reversals," the fund said in its Regional Economic Outlook for the Middle East and Central Asia.

"Growth in the region continues to outpace global growth and should average six-to-seven percent in 2006 and 2007," the IMF said.

The fund estimates the region's economic growth will expand to 6.6 percent in 2006 from 6.3 percent in

2005, before slowing to 6.2 percent in 2007.

"Inflation continued to edge up in 2005, averaging 7.25 percent, but appears to have stabilized in the first half of 2006," the report noted.

The outlook by the Washingtonbased fund also highlighted ongoing security concerns.

"The conflicts in the region and the worsening security situation, if not resolved, could affect the region's economic performance significantly," the report noted.

It said that Iraq, where tens of thousands of American troops are still fighting a violent insurgency, in particular is facing critical economic challenges.

"Significant challenges remain in Iraq for pursuing its program of economic stabilization and reform," the report said.

"Not least of these challenges are the ongoing security problems as well as corruption, especially in the oil sector. Until these are decisively addressed and solved, progress in reconstructing the Iraqi economy and its institutions will continue to be slow," the report said.

Elsewhere across the region, the IMF said that programs were being put in place to improve social and physical infrastructure. Such programs have been largely funded by

windfalls from oil exports.

"High oil prices and commodity prices have helped underpin economic growth," the report said.

It singled out Azerbaijan, Kazakhstan and Kuwait as states that have seen particular benefits from the recent spurt in world oil prices, which rocketed up to around 78 dollars a barrel this summer before falling sharply in recent weeks to around 60 dollars.

The IMF expects oil prices to average 69 dollars for the year.

However, the oil price gains have also stoked inflationary pressures, but "some countries (have) limited the pass-through of rising oil costs by subsidising petroleum products."

Across the region, "monetary policy (has been) largely accommodative, although tightening is now underway in some states where inflation has picked up."

The IMF expects all country groupings to make further progress in reducing debt, with the likely exception of Lebanon, which is trying to rebuild its infrastructure following an Israeli offensive triggered by Hezbollah's abduction of two Israeli soldiers.