May 29 (Bloomberg) -- U.K. house prices fell in May by the most since at least 1991 as the shortage of credit starved the property market of buyers, Nationwide Building Society said.

The price of an average home dropped 2.5 percent from April to 173,583 pounds ($344,000), Britain's fourth-biggest mortgage lender said today in a statement. That's the largest decline since the index started in January 1991. From a year earlier, prices fell 4.4 percent.

Bank of England Governor Mervyn King predicted this month that property values are ``likely to fall further'' and said there is a risk that the U.K. economy may contract. Mortgage approvals dropped in April by 39 percent from a year earlier, the British Bankers' Association said this week.

``With demand weakening, we're not expecting prices to be picking up for some time,'' Nationwide Chief Economist Fionnuala Earley said in an interview with Bloomberg Television. ``It would take more than one interest-rate cut to change the trend. We do expect there to be further house-price falls this year.''

The pound fell as much as 0.3 percent against the dollar after the report and traded at $1.9749 as of noon in London. The yield on the two-year gilt rose 6 basis points to 5.09 percent. Yields move inversely to bond prices.

Barrat Developments Plc, the U.K.'s second-largest homebuilder by value, fell as much as 2.6 percent today in London stock trading after the report. Persimmon Plc, the biggest homebuilder by market value, fell 3.9 percent.

Property values have now declined for seven months, the longest streak of drops since 1992, Nationwide said today.

Mortgage Squeeze

Homebuyers are paying more for mortgages as the global credit squeeze prompts financial institutions to curb lending. U.K. banks increased the cost of home loans with a 5 percent down payment to the highest in more than eight years in April, refusing to pass on the Bank of England's three interest-rate cuts since December.

Abbey, the U.K. unit of Spain's Banco Santander SA, was the last major British lender to withdraw its offer to finance 100 percent of property purchase in April. More than 20 banks offered loans equal to the value of the property in March.

``Banks are closing ranks and buyers are contending with additional costs for mortgages,'' said John King, at surveyors Quinton Scott in the southwest-London suburbs of Wimbledon, Kingston and Merton. ``Anything less than a half-point interest- rate cut isn't going to do anything for confidence. The market is going to be very tough for the rest of the year.''

`Continue to Deteriorate'

While Earley cautioned against putting ``too much weight'' on one month's figures, recent reports point in the same direction. HBOS Plc, the biggest mortgage lender, said May 2 prices fell in April on an annual basis for the first time since 1996, slipping 0.9 percent. Research company Hometrack Ltd. said this week that values declined in May by the most since November 2005.

``The housing market seems likely to continue to deteriorate,'' said Nick Bate, an economist at Merrill Lynch & Co. who used to work at the U.K. Treasury. ``Though individual measures can be volatile from month to month, all the main house price indices have turned down more forcefully in recent months.''

Price declines in April were the most widespread since at least 1978, the Royal Institution of Chartered Surveyors says. Apart from Scotland, where prices rose when unadjusted for seasonal swings, every region tracked by RICS showed declines.

Inflation Concern

The central bank kept the main rate at 5 percent on May 8 as record oil prices prompted the biggest jump in inflation since 2002 in April. Policy makers, who will announce their next decision in a week, signaled they have little scope to lower rates further as inflation accelerates, minutes of the meeting showed.

David Blanchflower, the only one of nine interest-rate setters to favor a reduction, said that the slowing economy will tame inflation in two years. The bank predicts that growth will slow to about a 1 percent annual pace by the first quarter, the least since 1992.

``Stronger than expected inflation data appears to have shattered hopes of an early cut in the bank rate in June,'' Earley said in the statement today. ``But more downbeat housing market data could lead more members to join David Blanchflower in voting for pre-emptive cuts.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net.

Last Updated: May 29, 2008 07:21 EDT