Current conditions in global financial markets look potentially "unstable", suggesting that investors need to prepare themselves for a significant "repricing" of some assets, Jean-Claude Trichet, president of the European Central Bank, warned at the weekend in Davos.

The recent explosion of structured financial products and derivatives had made it more difficult for regulators and investors to judge the current risks in the financial system, Mr Trichet said.

"We are currently seeing elements in global financial markets which are not necessarily stable," he said, pointing to the "low level of rates, spreads and risk premiums" as factors that could trigger a repricing.

"There is now such creativity of new and very sophisticated financial instruments . . . that we don't know fully where the risks are located," he added. "We are trying to understand what is going on - but it is a big, big challenge."

Mr Trichet's comments are a reflection of a debate now raging in international policymaking circles about the implications of the growth in the use of derivatives products.

Many investment bankers - and some regulators and economists - argued in some sessions at last week's meeting in Davos that the growth of the $450,000bn derivatives sector has been beneficial, since it has helped reduce market volatility this decade and made the system more resilient to shocks by spreading credit risk.

However, other officials fear that these instruments may now be raising leverage and risk-taking in the system to dangerous levels, and keeping the cost of borrowing at artificially low levels - thus increasing the chance of future financial crises.

A host of senior policymakers admitted that it has become hard for them to track the risks created by these products because the sector is opaque, much activity occurs in unregulated hedge funds, and products shift across markets rapidly - and between the boundaries of national central banks.

Andrew Crockett, president of JPMorgan international, said: "These new instruments ought to make markets more complete. But there is a lack of transparency . . . we don't know how much leverage there isin hedge funds, for example."

Malcolm Knight, managing director of the Bank for International Settlements, said: "Financial innovation has produced vehicles for leverage which are very hard to measure . . . liquidity is increasing very rapidly and this is affecting asset prices."

Central banks were scrambling to address the problem by intensifying their joint discussions via forums linked to the BIS, he said, but he warned that international co-operation and data gathering efforts "need to be deepened".

Stanley Fisher, governor of Israel's central bank, pointed out that it remained unclear "who takes responsibility for the [financial] system" at a time of crisis, particularly given that the "hegemony of the US is diminishing".