The recent conflict between Israel and Hezbollah was one of the main reasons for the decline, Mohsin Khan, IMF regional director for the Middle East and Central Asia, said on Monday.
The IMF had believed the Lebanese economy was on track to grow five per cent at the end of the first half of 2006, before the conflict erupted.
The IMF estimates that Lebanon suffered about $3.5 billion in damage caused by Israel bombardment and the forced sea and air blockade.
"We underestimated the impact of the blockade," said Khan in Dubai.
"It had a far more serious impact than we thought. The bulk of Lebanon's revenues come from customs and 90 per cent of that comes from the Beirut port and the airport."
International donors pledged more than $940 million after the conflict ended in August for Lebanon's immediate relief efforts, and Khan said another donor conference would be held in Beirut in December 2006.
He said the IMF was assessing Lebanon's needs but it was too early to estimate the size of any donor package.
"Given Lebanon's level of debt we would recommend that most financing come from grants," he said, "Lebanon cannot take any more debt."
Lebanon's public debt is equal to 175 per cent of gross domestic product, and Khan told said that the country' public finances were in need of urgent reforms.
An IMF report published on Sunday estimates Lebanon's 2006 budget deficit will rise to 13.8 per cent from last year's eight per cent.
Next year the IMF projects a deficit of more than 15 per cent of GDP.
Lebanon's economy grew by one per cent in 2005.
Nearly 1,200 people in Lebanon, mainly civilians, and 157 Israelis, mostly soldiers, were killed during the conflict.