Global financial stability was still not assured and significant policy challenges remained to be addressed even nearly four years after the onset of the severe financial crisis, the International Monetary Fund (IMF) said on Tuesday.

"The interaction between banking and sovereign credit risks in the euro area remains a critical factor, and policies are needed to tackle fiscal and banking sector vulnerabilities," the IMF noted in its latest report released on Tuesday.

At the global level, regulatory reforms were still required to put the financial sector on a sounder footing, according to the report entitled Market Update of the Global Financial Stability Report (GFSR).

The Washington-based institution said that relatively favorable fundamentals in some emerging market countries were spurring capital inflows, which meant that policymakers in emerging markets needed to watch diligently for signs of asset price bubbles and excessive credit.

The IMF released its latest biannual GFSR in October 2010 prior to the IMF and its sibling agency the World Bank's annual meeting.

"Equity markets in advanced and emerging market countries have risen since the October 2010 GFSR. Commodity prices have taken off, with oil, food, metals and raw material prices all rising rapidly, " according to the Tuesday report.

The IMF believed that capital inflows were normally beneficial for recipient countries, but sustained capital inflows could strain the absorptive capacity of local financial systems.

Despite improvements in market conditions since the October 2010 GFSR, sovereign risks within the euro area had intensified and spilled over to more countries, the IMF warned.

"Overall, while progress has been made and most financial sectors are on the mend, risks to global financial stability remain. Problems in Greece, and now Ireland, have reignited questions about sovereign debt sustainability and banking sector health in a broader set of euro-area countries and possibly beyond. Without further progress in this field, global financial stability and sustainable growth will remain elusive," noted the report.