July 31 (Bloomberg) -- U.K. house prices fell in July by the most in almost two decades as banks reined in lending to potential buyers and the economy edged closer to a recession.

The average value of a home dropped 8.1 percent from a year earlier to 169,316 pounds ($335,400), Britain's fourth-biggest mortgage lender said today in a statement. That's the biggest decline since at least 1991, when the U.K. was last in a recession. Prices are now the lowest since August 2006.

``The weakening economy and poor housing market sentiment do not suggest that the market will recover quickly,'' said Fionnuala Earley, Nationwide's chief economist, in a statement. ``The risk of an economic recession in the U.K. is now clearly rising.''

Britain's property slump is worsening as banks limit the supply of home loans and faster inflation prevents the Bank of England from cutting interest rates. That's threatening to tip the economy into its first recession since the early 1990s and is eroding support for Prime Minister Gordon Brown, whose popularity is near the lowest for any premier since World War II.

On the month, prices dropped 1.7 percent from June, a ninth consecutive decline, Nationwide said.

About 1.7 million U.K. homeowners are likely to see the value of their houses fall below the amount they owe on their mortgage, Standard & Poor's said yesterday. Consumer confidence dropped to the lowest in at least 18 years this month, GfK NOP said in a separate report today.

Mortgage lenders stung by the credit-market rout have exacerbated the property downturn by raising borrowing costs. The rate on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000, the Bank of England said July 9.

Recession Risk

Former HBOS Plc Chief Executive Officer James Crosby, who was asked by the government to consider ways to revive the home-loan market, said July 29 he doesn't see a recovery any time soon.

Bank of England Governor Mervyn King is refusing to rule out a recession and said in May that the economy may experience ``the odd quarter or two of negative growth.'' At the same time, inflation surged to 3.8 percent in June, the most in more than a decade and almost double the central bank's 2 percent target.

The central bank left the benchmark interest rate unchanged at 5 percent this month. The Monetary Policy Committee will next decide on rates on Aug. 7.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

Last Updated: July 31, 2008 02:00 EDT