Tánaiste Brian Cowen has warned of lower growth in current expenditure if economic conditions worsen due to the turmoil in the international markets.

Stating that the continuation of the credit crunch in financial markets could hurt economic growth forecasts for the Republic, he said that the Government would curtail the expansion of current spending rather than cut capital expenditure.

"I think it's very important to point out that we are in a good fiscal position. Just as we have managed the economy in good times, we also have to manage it in more challenging times," he said after a meeting of EU finance ministers. "What I'm saying is that, in that context, I am determined to maintain capital investment, and if that means - and it will mean - moderating the levels of growth in current expenditure in order to maintain broad budgetary balance, then that's what we must do."

Mr Cowen said that the moderation of prices in the housing market was welcome and was a return to more sustainable levels after the rapid growth in recent years.

Referring to the subprime mortgage crisis in the US, he said that the fundamentals of both the European and the Irish economy were strong, but he acknowledged that it remained unclear how the "credit crunch" on financial markets would play out.

"The downside risks of a continuation of volatility in the financial markets would affect growth prospects," Mr Cowen said.

He acknowledged that no one could say when the current period of volatility limiting the ability of banks to source loans would recede. "It is important to try and restore equilibrium in financial markets as quickly as possible and there is a confidence issue that has to be addressed. It is about sentiment and providing the direction."

Asked about the likely impact of the volatility on the Irish housing market, Mr Cowen said it was too early to tell if mortgage lenders would have to increase their interest rates for customers.

While declining to speculate on whether the ECB would increase interest rates next month, he said if rates went up it could affect domestic demand in the Irish economy as more disposable income was taken up by mortgage payments.

"A component of our growth in recent years has been good consumer spend on demand for the economy," he added.