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He predicted a "more severe and longer" US slowdown than most people expect.
And he said that the UK was worse-placed than America to weather the coming economic storm, because it had such a large financial sector and has had the biggest increase in house prices.
Mr Soros said that the current mandate of most of the world's leading central banks - where their main focus was fighting inflation - meant there was limited scope for cutting interest rates to help economies recover.
As for the Bank of the England, he said, "it was like a Greek tragedy", because they "couldn't do a U-turn" until there was a full-blown recession, which would finally take away the price pressures.
It was "inevitable" that they would keep rates too high for the good of the economy, he added. In part, Mr Soros is echoing the gloomy forecast of the world's central bankers in recent weeks.
The head of the European Central Bank, Jean-Claude Trichet, recently told the BBC that the "market correction was still on-going".
Mervyn King, the governor of the Bank of England, warned in the Bank's inflation report that UK inflation would rise above its target while the economy would slow sharply.
Mr Soros believes that central bankers are partly to blame for the credit crunch because of their past behavior in bailing out the financial sector whenever it got into trouble for over-lending, the so-called moral hazard problem.
He said that the central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.
And he said that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy.
These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.
Mr Soros believes that oil and other commodities are over-priced, but he sees little chance of the price of oil coming down until there is a big slowdown in the richer economies. He sees the price of oil as being driven by higher demand in developing countries such as China, where subsidized energy costs mean there is less price-sensitivity.
He also said that stock markets are still underestimating the severity and length of the economic downturn, especially in the US, and are now having a "bear market rally".
Mr Soros has credibility partly because he is prepared to invest his own money to back up his convictions.
The private investment fund he has resumed managing made a return of 34% last year betting that the credit crunch was more severe than many people expected.
Mr Soros was the man reported to have made a billion pounds in September 1992, betting correctly that the British currency would have to be devalued and leave the European Exchange Rate Mechanism.
Mr Soros has devoted much of time since then to philanthropy, especially in Eastern Europe.
By Sophie Borland
Last updated at 1:56 AM on 17th September 2008
Last night George Soros, one of the world's most powerful financiers, warned that the world was 'heading into a storm'.
Mr Soros, the financial speculator best known for cashing-in on the pound's withdrawal from the European Rate Mechanism on Black Wednesday in the 1990s said that the worst was far from over.
Mr Soros even claimed that we are only at the beginning of a major financial crisis.
George Soros: Is worried the world could collapse in a 1930s style depression
He compared the current situation with the Great Depression of 1930s which followed the Wall Street Crash of 1929.
Speaking on BBC's Newsnight, he said: 'We are not through it at all.
'We are heading into the storm rather than coming out of it. We are at a very precarious moment.'
When asked whether the US Government was wrong not to bail out the Lehman Brothers, he replied: 'Whether they should have been rescued depends on whether the financial system survives.
'If it survives then it was right to let them go bust. If there is a meltdown then it obviously wasn't.
'One thing is clear - We mustn't allow the financial system to collapse as it did in the 1930s.'
Referring to Hank Paulson, the US Treasury Secretary, he said: 'The way Paulson is handling the situation is reminiscent of the way the bankers handled it in the 1930s.'
He added: 'The financial system has gone overboard and the financial engineering has grown to big, it takes up too big a share in the world's resources.
'Now it is shrinking. When it becomes regulated it will be less profitable than the last 25 years.'
Speaking of the impact on Britain, he said: 'The financial industry is a major segment of the British economy. That's why Britain is more heavily hit by the financial crisis than most other economies.'
Financier Soros warns crisis will only get worse
LONDON (AFP) — US financier George Soros warned in a television interview Tuesday that the turmoil in the financial markets was far from over, with Britain likely to be the economy most badly hit by the crisis.
As Wall Street braced for the potential collapse of insurance giant AIG, the hedge fund pioneer told the BBC that the wisdom of letting Lehman Brothers go to the wall at the weekend would only be revealed with hindsight.
"I'm afraid we are not through it at all -- in some ways we are still heading into the storm rather than heading out of it," he said.
Asked whether the US government should have rescued Lehman investment bank, he said: "If the financial system survives then it was the right thing to do to let them go bust. If there is a meltdown then obviously it wasn't."
"Saving the system trumps moral hazard. In the end you do whatever it takes to save the system," he added.
However, he said the way US Treasury Secretary Henry Paulson was handling the situation was "very reminiscent of the way the central bankers talked in the 1930s", the time of the Great Depression.
Soros said Britain's reliance on the financial industry make it especially vulnerable.
"The financial industry is a major segment of the British economy and that's why I think Britain is more heavily hit by this financial crisis than most other economies," he said.
More generally, he warned finance had "grown too big, it has taken up too big a share of the world's resources. Now it is shaking and I think when it becomes once again regulated it will be less profitable".
Hedge funds suffer further pain
By Laurence Fletcher and Bill McIntosh
LONDON (Reuters) - The bankruptcy filing of Lehman Brothers is another blow for the hedge fund industry, but at least the damage is limited from here for funds exposed the U.S. investment bank.
Even legendary fund manager George Soros, who runs around $18 billion (10 billion pounds) in assets, is likely to have been affected after raising his stake in the investment bank to 9.5 million shares in the second quarter.
A spokesman for Soros Fund Management declined to comment on the composition of their portfolio.
British activist hedge fund Algebris is also likely to have been hit by the fall in the share price of Lehman, once the fourth-largest U.S. investment bank.
The hedge fund firm owned just over 4.45 million shares at end-June, Thomson Reuters data show. Algebris sold its stake this year, a spokesman said, declining to give further details.
The industry also saw its dealings through Lehman's prime brokerage business suspended, just as hedge funds seek to increase the number of banks they deal with to spread risk.
The slump in Lehman's share price is unlikely to have benefitted many hedge funds, even though they have the ability to short -- bet on a lower price for a security in the future.
Many had taken their bets off the table in recent weeks following the spike in bank shares in July, while shorting becomes more costly as the share price falls because fewer people are willing to be on the other side of the trade.
"At the end of the day, how many hedge fund managers will be shorting Lehman at $3.75, when it's come from $70?" said one fund of hedge funds manager
"Many have been reducing or taking off their short positions over the last few weeks or so."
Meanwhile, the slump in markets -- the FTSE 100 closed 3.9 percent lower at 5,204.2 -- will prove painful for long-short equity funds, most of which are positioned for rising markets.
"If you're not a pure financials-focused manager you'll be long something else. You might make money on the shorts but you'll lose money on something else," the manager said.
Lehman's collapse comes during a tough period for the hedge fund industry. HedgeFund Research's HFRI index is down 4.83 percent in the first eight months of the year, having fallen in each of the past three months.
PRIME BROKERAGE
Administrators said on Monday they had suspended all market trading activity at Lehman Europe, while hedge funds said they were unable to trade, despite being offered prices.
"Officially they are still open for business," an executive at one of London's biggest hedge fund firms said.
"In fact they are not trading anything. They might be unravelling trades but they are not taking any new trades. They are in limbo pending what is going to happen next."
Sources in the hedge fund industry on both sides of the Atlantic said Lehman was in stasis.
Lehman's private banking unit was not accepting orders and its foreign exchanging execution operation was not allowing trades even though it was offering prices, they said.
One hedge fund manager said that the investment bank's broker dealers had been instructed not to trade.
Lehman declined to comment on these issues.
Winton Capital, one of London's biggest commodity trading advisor CTA.L hedge funds, said on Monday that Lehman had been one of its eight counterparties for foreign exchange trading, but was no longer.
"We stopped trading with them last week and we have no counterparty exposure," a spokesman said.
The effect on the hedge fund industry is likely to be limited given that funds have had months to move their business away to safer rivals.
"A lot of people have seen this coming and I'm sure ... have reduced exposure," said a fund of hedge fund manager who requested anonymity to avoid drawing attention to his firm.
Hedge funds have slowly been increasing the number of prime brokers they trade with over the past year to limit exposure to a single counterparty, and this is likely to continue.
"This is something we (the hedge fund industry) will all have to look at," David Stewart, chief executive of hedge fund firm Odey Asset Management, told Reuters.
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