The IMF warned in a biannual economic outlook report that prospects for the region are "clouded by elevated levels of uncertainty."
"Such uncertainty may increase investors' perception of risk for the whole region, leading to capital outflows and exchange rate pressure," the global lender said.
The IMF forecasts the economy in Iran, the second largest in the region behind Saudi Arabia, will shrink by 6.0 percent this year after contracting by 3.9 percent in 2018.
The United States reimposed sanctions on Iran last year following its withdrawal from a 2015 nuclear accord.
The United States, which reimposed sanctions against Iran’s oil exports last November, this month demanded buyers of Iranian oil to stop purchases by May or face sanctions, ending six months of waivers which allowed Iran’s eight biggest buyers to continue importing limited volumes.
Jihad Azour, the IMF Middle East and Central Asia director, said the projection was made before the US tightened up measures targeting Iran's oil industry last week.
“Clearly the reimposition of sanctions and the removal of the waivers will have additional negative impact on the Iranian economy both in terms of growth and in terms of inflation, where inflation could reach 40 percent or even more this year,” he said.
Taming Iran inflation
The Iranian currency, the rial, lost more than 60 percent last year, disrupting Iran’s foreign trade and boosting annual inflation.
The Iranian rial official rate is set at 42,000 rials to the US dollar, but its market rate stands at around 144,000 against the US dollar.
Iran should work to eliminate the gap that currently exists between the market exchange rate and the official exchange rate, said Azour.
“By aligning the market and official rates this will help tame and control inflation and will reduce pressure on the exchange rate.”
The currency’s slide, from levels around 43,000 at the end of last year, has eroded the value of ordinary Iranians’ savings, triggering panic buying of dollars.
For oil exporters growth was down at 0.4 percent for 2019, while importing countries were expected to increase at 3.6 percent this year, from 4.2 percent in 2018.
The IMF said economic growth in the broader region was negatively impacted by rising conflict, corruption, slow reforms, high levels of debt and continued oil price fluctuations.
"Social tensions are rising in the context of lower growth and reform fatigue, threatening macroeconomic stability," it said.
After the first wave of uprisings sweeping the Arab world in 2011, the region is now witnessing fresh upheaval in Algeria and Sudan and fighting intensified in Libya and Yemen.
As a result, reforms in the region have become more urgent to decrease dependence on oil and create millions of jobs, especially for the youth.
"For oil exporters, they are important to be less dependent on the volatility of oil price and for diversifying their economies," Azour said.
AFP and Reuters contributed to this story.