July 1 (Bloomberg) -- U.K. house prices fell by the most since 1992 and manufacturing unexpectedly contracted in June as banks starved the economy of loans and commodity prices soared, bringing the nation closer to a recession.

The price of an average home declined 6.3 percent from a year earlier to 172,415 pounds ($343,278), the biggest drop since November 1992, Nationwide Building Society, Britain's fourth- biggest mortgage lender, said today. An index of manufacturing fell to 45.8, the least since 2001, according to the Chartered Institute of Purchasing and Supply.

``The economy has yet to feel the full effect of the credit crunch, and there are negative effects from the high oil price,'' said Lena Komileva, an economist at Tullett Prebon in London. ``Recession is a great possibility. We're getting closer to a 50 percent chance.''

Real-estate stocks had their worst performance in more than 20 years in the second quarter and Bank of England Governor Mervyn King predicts ``extremely weak activity'' in the housing market. With inflation accelerating, policy makers are now considering whether they can risk raising interest rates after the slowdown spread to manufacturing, representing 15 percent of the economy.

Denmark slid into a recession in the first quarter, the first European Union economy to contract for two consecutive quarters since the global credit crunch started, while confidence among Japan's biggest manufacturers fell to a four-year low, separate reports showed today.

Property Stocks

U.K. property stocks extended their slide today. Shares of Taylor Wimpey Plc, the nation's largest homebuilder, declined 4.8 percent and building materials distributor Travis Perkins Plc, which has lost almost three fifths of its value this year, fell 5.9 percent.

House prices fell 0.9 percent in June, the eighth consecutive monthly drop, according to Nationwide. The pace of decline on the month was slower than the 2.5 percent drop in May, the most since the index started in January 1991. On the quarter, Northern Ireland led annual declines.

Luxury-home prices in central London, the world's most expensive location for prime real estate, fell for a second month in June as sales slumped, Knight Frank LLP said in a separate report.

``I can't see this price decline coming to an end any time soon,'' said George Buckley, an economist at Deutsche Bank AG in London who predicts values may fall at least 10 percent this year. ``The biggest driver in prices tends to be approvals and yesterday's figure was quite shocking.''

Mortgage Loans

Banks granted 42,000 loans for house purchase in May, compared with 57,000 in April, Bank of England data showed yesterday. An index of consumer confidence fell to minus 34 in June, the lowest since the London riots in 1990 which contributed to Margaret Thatcher's downfall as prime minister.

Falling house prices risk pushing the U.K. economy into recession, as slowing growth and falling confidence curbs Britons' spending. King said June 19 that ``lower demand in the high street will go hand in hand with lower demand in the property market.''

Still, accelerating inflation makes it more difficult for policy makers to kick-start economic growth by cutting rates. Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade. Crude oil reached a record above $143 a barrel yesterday.

Policy makers John Gieve, Timothy Besley, Paul Tucker and Kate Barker, who testified with King on June 26, all said they had considered a vote for higher interest rates last month. The panel kept the benchmark rate at 5 percent for a second month and will meet again next week.

The central bank said in May that the annual rate of economic growth will drop to around 1 percent, the lowest since 1992.

The CIPS index of manufacturing was lower than the 49.8 median forecast in a Bloomberg News survey of 34 economists. A reading lower than 50 signals contraction.

Shares of DS Smith Plc, owner of the Spicers office products brand, fell to the lowest in eight years on June 26 after the company said its operating profit will be hit by lower demand and higher polymer prices. The company raised corrugated case packaging prices to offset rising energy, wood and waste paper costs.

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net; Jennifer Ryan in London at Jryan13@bloomberg.net.

Last Updated: July 1, 2008 06:52 EDT