The Organization for Economic Cooperation and Development on Monday revised downward its forecast for Japan's economic growth in 1998 by 1.2 percentage points to 1.7 percent, partly because of the worsening problems in the financial sector, the organization said.

"Tensions in financial markets, which began in Thailand in mid-1997, spread to a number of other countries in East Asia, including Japan and South Korea, in the following few months," the organization said in its latest economic outlook report, which is issued twice a year. "In Japan, where the expansion that started in 1996 faltered during 1997, the recovery has become increasingly fragile."

The organization said in its earlier forecast released in June that Japan's economy would grow 2.9 percent in 1998. The organization also revised downward its outlook for Japan's economic growth in 1997 from 2.3 percent to 0.5 percent.

It also predicted that Japan's economy will grow 2.1 percent in 1999. It is urging the Japanese government to "act promptly and effectively to restore confidence in the financial sector." It encouraged the government to promote measures such as the use of government funds to stimulate the economy.

"Reduction in the level of taxation, to be seen as part of a more comprehensive fiscal reform, offset at a later stage by cuts in subsidies and other inefficient public expenditure, may provide an example of such measures," the organization said. Japan is the only major industrialized country whose growth outlook was revised downward from the previous outlook in June. The Paris-based organization revised its projections for the United States and other developed nations upward.