Oct. 29 (Bloomberg) -- U.K. mortgage approvals stayed close to a record low and consumer credit rose at the weakest pace since 1993 after the worsening financial crisis prompted banks to tighten lending, pushing the country towards a recession.

Lenders approved 33,000 loans for house purchase in September, up from 32,000 in August, the lowest since comparable data began in 1999, the Bank of England said. Economists expected approvals to be unchanged, according to the median of 26 forecasts in a Bloomberg News survey. Consumer borrowing rose 0.1 percent on the month, the least since April 1993.

The outlook for the U.K.'s struggling economy deteriorated after the collapse of Lehman Brothers Holdings Inc. last month made banks more wary about lending to each other and to households. The economy contracted for the first time in 16 years in the third quarter and as the housing slump worsens, the Bank of England predicts that 10 percent of mortgage holders may soon owe more than their homes are worth.

``The U.K. didn't sneak into recession, it jumped,'' said Alan Clarke, an economist at BNP Paribas SA in London. ``There are worse figures yet to come.''

The pound was little changed after the report, and traded at 1.6013 as of 10:14 a.m. in London. The pound earlier rose against the dollar for a second day on speculation a rally in stocks will bolster demand for the British currency.

Net consumer credit rose by 300 million pounds ($480 million) in September, down from 1.1 billion pounds the previous month. The value of mortgages awarded rose to 4.2 billion pounds last month from 4.1 billion pounds, while the amount of loans secured against homes rose 2.2 billion pounds in September, the Bank of England said.

Grip on Lending

That came after revised figures showed a net repayment of 700 million pounds in August, the first since the series started in 1993.

U.K. banks are keeping a grip on loans even after the government this month bought stakes in lenders such as Royal Bank of Scotland and HBOS Plc to stave off a financial collapse. The Bank of England is also trying to ease strains in credit market, described by Deputy Governor John Gieve yesterday as ``acute,'' and on Oct. 8 policy makers cut the benchmark rate by 50 basis points to 4.5 percent along with other central banks.

``There is little positive to take from today's report,'' said George Buckley, an economist at Deutsche Bank AG in London. ``The supply of loans remains impaired, and demand is falling due to weak economic prospects.''

British house prices have continued to fall despite the prospect of further reductions to come. Home values fell by the most in at least seven years in October, led by London, Hometrack Ltd. said Oct. 27.

Magic Bullet?

``A cut in bank rate, on its own, will not be a magic bullet,'' policy maker Timothy Besley said at a speech in London late yesterday. ``An element of patience is required'' for lower rates to feed through because ``the traditional channels of monetary policy effectiveness'' are ``impaired,'' he said.

Capital Economics Ltd. calculates that the current rate of mortgage approvals suggests annual house-price declines of as much as 25 percent compared with 13 percent at present.

Repossessions surged 71 percent in the second quarter from a year ago, the Financial Services Authority said this week. The Bank of England estimates that a 15 percent drop in house prices would push 10 percent of mortgage-holders into so-called negative equity.

Britain's economy shrank 0.5 percent in the third quarter, evidence the country is in the grips of its first recession since 1991. The International Monetary Fund predicts the world's advanced economies will next year grow at the slowest pace since 1982 as the U.S. falters, and global growth will be 3 percent, on the cusp of the group's informal definition of a world recession.

With growth faltering, the Bank of England will probably cut interest rates by a further half a point to 4 percent on Nov. 6, according to the median forecast of 30 economists surveyed by Bloomberg News.

To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.

Last Updated: October 29, 2008 06:19 EDT