The International Monetary Fund said Wednesday that Britain was a long way from a "sustainable recovery", and called for the government to boost infrastructure spending in order to accelerate economic growth and offset austerity.
"Recent data suggest some improvement in economic and financial conditions," the IMF said in a statement published at the conclusion of its latest mission to London, highlighting recent figures that indicated an uptick in economic activity.
"The UK is, however, still a long way from a strong and sustainable recovery," it added, noting that capital investment as a share of GDP was at a postwar low, while youth unemployment was high.
The IMF repeated its call for British finance minister George Osborne to ease the coalition government's austerity drive, despite the minister's pledge last week to stick by his deficit-slashing measures.
"The key risk is that persistent slow growth could permanently damage medium-term growth prospects," the IMF said.
"After five years of relatively weak activity, additional measures are needed to raise long-term expectations of potential growth, while rebalancing necessitates a transformation to a high-investment and more export-oriented economy."
The Conservative-Liberal Democrat government insists that its austerity measures are needed to drive down the record budget deficit inherited from the previous Labour administration in 2010.
David Lipton, the IMF's First Deputy Managing Director, said during a news conference in London that ongoing austerity would hurt growth.
"Our view of the fiscal situation is that the discretionary fiscal measures that are planned for this year will likely impart a drag on the economy and it would be desirable to try and offset that drag by bringing forward infrastructure spending and undertaking some tax measures," Lipton told reporters.
He said infrastructure spending would give the economy a "significant kick".
Chancellor of the Exchequer Osborne, speaking at the conference,agreed with the need to prioritise infrastructure investment "where we can."
"That's why we are investing more in capital than my predecessor planned; That's why I've added in the last two years to those plans," Osborne said.
He added: "It's a hard road to recovery, but we are making progress. Of course there is further to go -- and we have to go on confronting the difficult choices to help our economy heal."
The British economy shrank by 0.3 percent in the final three months of 2012, hit by state austerity and ongoing fallout from the eurozone debt crisis.
However, it grew by 0.3 percent in the first quarter of 2013, according to preliminary estimates, leaving the economy essentially flat over the past six months.
The Office for National Statistics was due on Thursday to give its second official estimate of British gross domestic product (GDP) for Q1.
In addition, the IMF also called on the government to adopt a "clear" plan to sell its stakes in state-rescued Royal Bank of Scotland and Lloyds Banking Group, and warned that they might need more state funds.
"A clear strategy is needed for the two government-intervened banks, with a view to returning them to private ownership," it added.
Both RBS and LBG were bailed out by Britain at the height of the 2008 global financial crisis. The government still owns 81-percent of RBS and 39 percent of Lloyds.
- Dow Jones Newswires contributed to this report -