Christine Lagarde said on CNN's "State of the Union" world financial markets would no doubt plunge if Washington cannot meet the deadline for an agreement on the cliff next month, but could also rebound quickly if a comprehensive deal was on the horizon.
"It would react in the stock market really taking a hit," Lagarde said regarding the looming deadline. "But I would also say that it will depend on what's on the horizon."
"If what's on the horizon is a bigger, better, comprehensive deal that addresses both the short-term issue of the fiscal cliff, the debt ceiling, and the long-term deficit and debt levels, then that (reaction) would be different," she said.
Lagarde said the size and relatively closed nature of the U.S. economy plus its ability to borrow on world debt markets at low rates separated the United States from the more-volatile European economies.
At the same time, Lagarde said, the seemingly slow progress of the fiscal-cliff negotiations continued to act as a drag on the overall economy. "There is still that degree of uncertainty that fuels doubt, that prevents investors, entrepreneurs, households from making decisions because they don't know what tomorrow will be," she said.