July 10 (Bloomberg) -- U.K. house prices fell the most in 15 years in June as rising interest rates and reduced mortgage lending exacerbated the worst property slump since the last recession in 1991, an HBOS Plc report showed.

The average market value of a home declined 6.1 percent in the three months ending in June from a year earlier, the biggest drop since March 1993, the U.K.'s biggest mortgage lender said in a statement on the Regulatory News Service today. Prices fell 2 percent on the month to an average 180,344 pounds ($356,000).

Declining house prices are damaging consumer confidence and eroding support for Prime Minister Gordon Brown. Bank of England policy makers today refrained from cutting the key interest rate after inflation reached the fastest pace in more than a decade.

``The sharp downturn in the housing market will hit consumer spending and residential investment hard,'' said Nick Kounis, an economist at Fortis Bank and a former U.K. Treasury official. The U.K. economy may be ``flirting with recession in the second half of the year.''

Recent opinion polls have given the opposition Conservatives a lead of 20 points or more over the ruling Labour Party, enough to form a majority government. Seventy-two percent of respondents said they're not satisfied with Brown's performance since he succeeded Tony Blair 13 months ago, according to a poll by Populus Ltd. published July 7.

Labour's deputy leader, Harriet Harman, standing in for Brown in Parliament yesterday, said ``the current state of the U.K. housing market is of grave cause for concern.''

Job Cuts

Barratt Developments Plc today became the fifth U.K. homebuilder this month to announce job cuts to cope with the property downturn. U.K. mortgage rates surged to the highest in eight years last month, the central bank reported yesterday.

The slump comes after house prices tripled in the previous decade, fueling a consumer spending boom and saddling Britons with a record 1.4 trillion pounds of debt.

``The decline in prices is driven by a squeeze on spending power, affordability difficulties due to the rapid rise in house prices in the last few years and the decline in credit availability resulting from the crisis in the financial markets,'' HBOS said in the statement.

Consumer confidence plunged to the lowest since 1990 last month after inflation accelerated to 3.3 percent in May, exceeding the government's upper 3 percent limit for only the second time in a decade. Lehman Brothers Holdings Inc. says the economy may start to contract this quarter.

Concerns about inflation led the Bank of England to keep the key rate at 5 percent today, the highest among the Group of Seven nations. All but one of 49 economists in a Bloomberg News survey correctly predicted the decision.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

Last Updated: July 10, 2008 07:30 EDT