SEOUL - The International Monetary Fund (IMF) cut on Tuesday its outlook for South Korea's 2012 economic growth to 3.25 percent from a previous forecast of 3.50 percent due to dimmer global economic outlook.

"Reflecting the weakening global outlook, Korea's growth is likely to be weaker than the 3.5 percent in our baseline forecast and we expect growth for this year is likely to be reduced by about 0.25 percentage point," the IMF delegation said in a statement after completing their two-week annual meeting with Seoul officials.

The Asia's No.4 economy was expected to gain momentum later this year due to competitive export sector and the recently concluded free trade agreements with the United States and the European Union (EU).

The delegation, however, warned that its growth outlook for South Korea was subject to substantial uncertainties, saying that the main downside risks to the economy will come from the crisis in Europe. It noted that if weakness in Europe were to spill over the US and China, the impact on South Korean can be substantial.

The IMF said that external vulnerability of the South Korean financial system has diminished considerably since 2008 due to higher foreign reserves relative to short-term foreign debts, lower reliance on external funding for the banks and the adoption of a series of macro-prudential measures.

The fund, however, recommended that the authorities should enhance its contingency planning for tail risks, saying that South Korea is one of the most open economies in Asia and is highly exposed to volatile capital flows and foreign currency funding risks.

The high level of household debt has been a concern, and lending by non-bank financial institutions to households has recently grown at a rapid pace, the IMF said, adding that the household debts should be monitored closely with corrective actions taken if necessary.