April 8 (Bloomberg) -- U.K. house prices dropped by the most since 1992 in March as the seizure in credit markets worldwide forced banks to pull mortgage offers, a report by HBOS Plc showed.

The average cost of a home in Britain fell 2.5 percent to 191,556 pounds ($379,000) from February, HBOS, the U.K.'s biggest mortgage lender, said in a statement today. The 1 percent drop in the first three months of this year from the fourth quarter was the biggest since 1995.

The pound fell after the report on speculation that the Bank of England will reduce the benchmark lending rate on April 10 for the third time since December to prevent an economic slump. Abbey, the U.K. unit of Spain's Banco Santander SA, today became the last major British lender to stop offering home loans that require no down payment as rising funding costs hamper banks' ability to lend.

``We're in for a long period of house prices falling or not growing at all,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``It's another reason for the Bank of England to cut interest rates this week.''

Economists predicted a 0.3 percent monthly decline in house prices, the median of 12 estimates in a Bloomberg survey show. The pound fell as much as 0.6 percent against the dollar after today's report and traded at $1.9718 as of 11:58 a.m. in London.

End of the Boom

The U.K. has the second-highest proportion of homeownership among the Group of Seven industrialized nations, after Italy. A decade-long housing boom fuelled 62 consecutive quarters of economic growth and helped seal three election victories for the ruling Labour Party led by Tony Blair, and his successor as Prime Minister, Gordon Brown.

The government nationalized Northern Rock Plc after the Newcastle-based mortgage lender struggled to fund its business as money-markets rates surged last year. Banks worldwide have announced more than $230 billion in losses and writedowns following the collapse of the U.S. subprime mortgage market.

Three-month euro Libor, a measure of the cost of borrowing between in euros, rose to 4.74 percent today, the highest since the end of December. The rate for pounds was at 5.93 percent today after reaching 6.1 percent last week, the highest level this year.

Shares of U.K. property companies also declined. Barratt Developments Plc, Britain's second-biggest homebuilder by volume fell 6.1 percent. Taylor Wimpey Plc, the U.K. No. 1, declined as much as 3.8 percent.

Rate Decision

Fifty of the 61 analysts surveyed by Bloomberg News predict policy makers, led by Governor Mervyn King, will cut the benchmark interest rate by a quarter point to 5 percent on April 10. That would still be the highest among the G-7 nations and compares with the Federal Reserve's main rate of 2.25 percent and the European Central Bank's 4 percent.

While former Fed Chairman Alan Greenspan said today that the drop in U.S. home prices will probably end before next year, some economists say U.K. values have further to fall. David Miles, chief U.K. economist at Morgan Stanley, predicts they will drop by 10 percent in 2008.

All mainstream U.K. lenders have now withdrawn their 100 percent mortgage offers. More than 20 banks offered loans equal to the value of a home at the beginning of March, the Financial Times said today.

`Modest Fall'

``We expect there to be a modest fall in house prices this year,'' said Martin Ellis, chief economist at HBOS, who had previously forecast prices would be unchanged this year. ``Any declines, however, should be viewed in the context of the significant price rises over recent years.''

U.K. house prices are still up 171 percent over the past decade, HBOS said, and Ellis predicts a growing labor market to continue underpinning the housing market.

Unemployment fell to the lowest since 1975 in February, retail sales unexpectedly rose and Bank of England policy makers said at their last rate decision in March that economic growth was more resilient than they expected.

Still, banks including Nationwide Building Society, HSBC Holdings Plc and Royal Bank of Scotland Group Plc have raised borrowing costs or scaled back loan offers even after two interest-rate reductions by the Bank of England since December. U.K. mortgage approvals stayed close to a nine-year low in February, central bank data show.

`Very Uncertain'

``We were excited about buying our first house, but now we're worried about making a big financial commitment when prices are falling,'' said Robin Agnes, 30, a civil servant in London. ``I feel very uncertain.''

Brown said today that the government will ``do everything in our power'' to help homebuyers by expanding ``shared equity'' plans, where people buy a portion of their home and rent the rest from a developer who retains a stake in the property. ``I want to show that homebuyers will get the best support from the government,'' Brown said.

HBOS said April 4 that new customers at Halifax face higher interest-rate payments if they provide less than a 25 percent deposit for their home purchase. It refused to comment on a report the previous day that it may halt current home-loan deals.

``I'm definitely a victim of the credit-crunch,'' said Dania Vize, 39, an account manager in London. Her monthly home payment went up more than 100 pounds when she re-mortgaged and her credit card limits have been reduced in the past few months. ``Banks have gone from giving you money willy-nilly to being much, much more careful about who they lend to.''

Today's report is the third in the past two weeks showing that the property market is slowing. Hometrack Ltd. said on March 31 that U.K. home values fell for a sixth month, while a Nationwide survey showed March 28 that consumers predict property values will fall 3 percent in the next six months.

The U.K. central bank forecasts economic growth will cool this year to an annual 1.6 percent rate in the fourth quarter, matching the slowest pace since 1993. Lehman Brothers Holdings Inc. predicts the slowdown may be worse and says there's a 35 percent chance of a recession in the next two years.

To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

Last Updated: April 8, 2008 07:17 EDT