Central banks should brace for weaker growth-OECD

* OECD sees sharp year-end slowdown led by Germany

* Central banks urged to keep rates on hold

* Prolonged weakness would merit more action on rates

By Leigh Thomas

PARIS, Sept 8 (Reuters) - Developed countries face a sharp year-end slowdown led by a contraction in Germany, the OECD said on Thursday, urging central banks to keep rates low or pursue other forms of monetary easing if the downturn becomes entrenched.

The estimates marked a sharp downgrade from the Paris-based organisation's last forecasts in May but used different methodology so were hard to compare precisely. OECD chief Angel Gurria said last month the OECD was preparing to cut its outlook for Europe and Japan.

The Organisation for Economic Cooperation and Development forecast growth across the G7 group of major industrialised economies would average 1.6 percent on an annualised basis in the third quarter before slowing to just 0.2 percent in the final three months of the year.

The slowdown would hit Germany particularly hard, according to the OECD's estimates, forecasting that Europe's biggest economy would see annualised growth of 2.6 percent in the third quarter before contracting 1.4 percent in the final quarter of 2011.

The U.S. economy, meanwhile, was forecast to see annualised growth of 1.1 percent in the third quarter slow to 0.4 percent in the fourth quarter.

The OECD, which is due to provide more complete forecasts later this year, warned that its latest forecasts had an abnormally high margin of error due to exceptional uncertainty.

CENTRAL BANKS TO THE RESCUE

With the full impact of recent debt troubles in Europe and the United States still unknown, the OECD warned that risks were high that growth could prove even weaker than foreseen in its latest forecasts although it ruled out a recession on the scale of the 2008-2009 financial crisis.

In light of the fast deteriorating outlook, the OECD said that central banks should keep interest rates on hold.

"If in the coming months signs emerge of the weakness enduring or the economy risks relapsing in recession, rates should be lowered where there is scope," the OECD said.

With U.S. and Japanese interest rates close to zero, the OECD said that central banks should consider, where needed, further interventions in securities markets and make strong commitments to keep interest rates low for an extended period.

The report came amid signs that central banks are concerned about the weaker outlook for growth.

The European Central Bank is meeting on Thursday and is expected to signal a change in policy direction, halting an interest rate rise cycle as the euro zone debt crisis weighs on the economy.

The Bank of England was also meeting on Thursday with investors watching for signs of more stimulus to help the ailing economy. And on Wednesday the Swiss National Bank set a target to cap the franc's rise against the euro to protect the economy.

Many countries would not be able to look to the government for fiscal stimulus because of their weak finances, the OECD said, but urged those in a stronger position to consider more easing if the slowdown proves long-lasting. (Reporting by Leigh Thomas; Editing by Anna Willard)