The world's financial systems require the biggest overhaul since the Second World War if they are to cope with the credit crunch and the threat of a world recession, Chancellor Alistair Darling said last night.

He urged major reforms of financial institutions as he met international colleagues amid what he admitted was "the biggest economic shock since the Great Depression".

An early warning system to alert capitals to impending market turmoil was one change needed to prevent global bodies becoming "marginalised and ineffective", he said.

In a speech in Washington ahead of the International Monetary Fund (IMF) and World Bank's spring meetings, Mr Darling said the 1940s institutions "need to adapt to today's problems".

The spring meetings come at what Mr Darling described as a critical time and follow the IMF's warnings of a slowdown in UK growth and a "mild recession" in the US.

The Chancellor called for changes to the IMF's structure to take into account the knock-on effects of trouble in one market on others around the world.

The current economic turbulence following the collapse of the sub-prime mortgage market in the US has shown how "events in one country can impact on others around the world".

Mr Darling called for a beefed-up role for ministers in setting the IMF's priorities and holding it to account. "I want to make the case for urgent action by the world's major economies to deal with what is the biggest economic shock since the Great Depression and to make the case for reform of our international institutions to meet the challenges of the 21st century," he said.

He added: "There are two key lessons that can be drawn from the current crisis. First, that national economies are intimately linked and that events in one country can impact on others around the world.

"Second, that there is a need for national policy makers to take action in response to the risks that have been identified. That is why the IMF needs to work with the Financial Stability Forum (FSF) to develop an early warning system. A system that would identify the risks to macroeconomic stability.

"As part of this I believe that the IMF must focus its surveillance more closely on financial sector issues and on the links between developments in the financial sector and the real economy.

"The IMF should also strengthen its analysis of spill-overs between economies, so that we have a better understanding of how difficulties in one market in one country can be transmitted to another through the establishment of a multilateral surveillance department to shift the focus from national surveillance."

The Chancellor spoke of the need to combine at a global level the best understanding of the sources of risk with the best understanding of the policy responses.

The "critical point", according to Mr Darling, is that "all long-standing and established organisations need to be ready to change.

"If not they will become marginalised and ineffective in supporting the co-operation needed to deal with global events and issues."

He added: "The international meetings this weekend are important meetings which are taking place at a critical time. Finance ministers must take action to support the global economy in the short term."

A Treasury official said the early warning system would combine analytical expertise with the real-time experience of policy and markets.

"We want the Fund to become more forward-looking and proactive. It is fine to have excellent analysis after the event, but also vital for the IMF to be forward-looking," he said.