March 31 (Bloomberg) -- The pound fell to a record low against the euro, posting its biggest-ever quarterly decline, after an industry report showed U.K. house prices slipped for a sixth month in March.

The pound also had a fifth monthly drop versus the common European currency and slipped for a third day against the dollar, as signs the worldwide credit squeeze is hurting the economy prompted traders to bet on an interest-rate cut next week. U.K. banks forecast lending conditions will worsen in the next six months, causing a ``prolonged period of slower growth,'' the Confederation of British Industry said today.

``We see further downside to the pound,'' said Paul Robinson, a currency strategist at Barclays Plc in London and a former Bank of England economist. ``The key threat to the U.K. economy is that the housing sector and companies are finding credit much more difficult to come by. If the BOE thinks credit conditions are becoming tighter it increases the likelihood of an interest-rate cut.''

The British pound dropped to 79.82 pence per euro, the lowest level since the common currency's 1999 inception, and was at 79.59 pence by 5:40 p.m. in London, from 79.21 pence at the end of last week. It fell 4.3 percent in the month, the most since February 2003, and declined 8.3 percent in the quarter.

The U.K. currency also weakened to $1.9854, from $1.9944 on March 28, and fell 0.2 percent in the month. The pound dropped versus 13 of the 16 most-traded currencies tracked by Bloomberg today and against 12 in the past three months.

Gilts Surge

Two-year government notes rose the most in two weeks. The yield on the two-year note fell 18 basis points to 3.81 percent, the lowest level in a week. The price of the 5.75 percent security due December 2009 climbed 0.29, or 2.9 pounds per 1,000- pound ($1,986) face amount, to 103.13. Ten-year yields dropped 5 basis points to 4.35 percent.

Two-year notes rallied for a fifth month, with the yield dropping 24 basis points, the most this year, and climbed for a third quarter, the longest run of gains since 2001. Ten-year gilts advanced for a ninth month and for a third quarter.

Still, U.K. government bonds were outperformed by their counterparts in Europe and the U.S. in the three months from January to March. Gilts handed investors a 1.1 percent return, according to indexes compiled by Merrill Lynch & Co., compared with German bunds' 1.9 percent return and the 4.2 percent paid by U.S. Treasuries.

Gains Won't Last

Two-year U.K. notes will reverse their gains, with the yield climbing to 4.15 percent by midyear and 4.23 percent by year-end, according to the weighted average of eight forecasts in a Bloomberg survey. Ten-year gilt yields will rise to 4.44 percent by the end of the second quarter and 4.53 percent by Dec. 31, a separate survey indicates. Yields move inversely to bond prices.

The U.K. will sell two-year notes for the first time in a decade in the coming quarter, the Debt Management Office said today on its Web site. The 3.75 billion pounds of 4.75 percent securities due 2010 will be auctioned April 3 to tap investors' demand for shorter-dated government debt.

The pound had its biggest quarterly drop versus the yen in a decade, sliding 12 percent, as stock-market losses damped appetite for higher-yielding currencies bought using cheap loans from Japan. The pound today was little changed at 198.03 yen, near the lowest level in a week.

The average cost of a home in England and Wales declined 0.2 percent to 174,100 pounds as banks curtailed lending and consumers lost confidence in the property market, London-based research company Hometrack Ltd. said today. The annual growth rate fell to 0.4 percent, the lowest in two years.

Housing Market

The report added to evidence Britain's decade-long property boom may be coming to an end. Consumers predict property values will fall 3 percent in the next six months, a Nationwide Building Society survey showed March 28, while the British Bankers' Association said last week mortgage approvals fell by almost a third in February.

Bank of England Governor Mervyn King told Parliament last week he'd ``be surprised if, in a few years' time, house prices are markedly above where they are now.''

Britain's banks forecast credit-market turmoil will last at least until the end of the year, twice as long as they predicted three months ago, according to a quarterly survey released today by the CBI, the country's largest business lobby.

The pound extended losses against the euro after European Union data showed inflation among the 15 nations that share the common currency accelerated to the fastest pace in 16 years this month.

King on Inflation

Britain's currency stayed lower even after King said in Israel today it's ``crucial'' policy makers prevent inflation becoming entrenched in the economy, signaling he may be reluctant to lower borrowing costs. Price growth has exceeded the Bank of England's 2 percent target for the past five months.

Implied yields on short-sterling futures contracts fell as traders added to wagers Britain's central bank will reduce borrowing costs to kick-start the economy.

The yield on the contract due June dropped 3 basis points to 5.46 percent, still up in the month and the quarter. The yield on the contract maturing December slipped 3 basis points to 4.85 percent, little changed since the beginning of this year.

The U.K. central bank will cut its main rate to 5 percent from 5.25 percent April 10, according to 17 of 30 economists surveyed by Bloomberg News, with the rest predicting no change.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: March 31, 2008 12:45 EDT