£28,000 knocked off house prices by banks crisis

The average price slumped 6.8 per cent, from £412,731 to £384,632, between last month and this month.

The figures, compiled by estate agency website Rightmove, show prices are still higher than a year ago, but only by 8.3 per cent.

The monthly fall has affected all 32 London boroughs and provides the starkest evidence yet that the credit crunch and consumer downturn is hurting the property market. Experts now predict the borrowing squeeze will cause London prices to fall by three per cent next year and in 2009.

Analyst Howard Archer, of Global Insight, said: "We have already seen a significant drop in mortgage lending and in buyers approaching estate agents. The average time it takes to sell a house is the longest for two years, and the number of mortgages offered in October was the lowest for almost three years. Sellers have had to accept offers well below the asking prices, so it is hardly surprising that they have finally seen the need to lower the asking prices."

Although the price fall is dramatic, Rightmove said it had been exaggerated by the timing of the last phase of the introduction of home information packs.

It says a third of the drop was due to a greater number of smaller properties being put on the market last month, to get ahead of the introduction of home packs for all houses, which took place on Friday.

Miles Shipside of Rightmove said: "We calculate that the one-off surge in the least expensive properties was responsible for 2.3 percentage points of the fall. However, even allowing for that, the price fall is by far the biggest we have seen at this traditionally quiet time of the year.

"It is normal that only fairly desperate sellers are active just before Christmas and prices are always reduced accordingly. But the size of the reductions this December is further confirmation of sellers having to readjust prices downwards."

The biggest percentage falls were in Hackney (10.2 per cent), Tower Hamlets (9.6 per cent), and Southwark (8.3 per cent).

In cash terms, the largest drops were in Kensington and Chelsea (about £80,000), Westminster (£50,000), Hackney (£48,000) and Islington (£45,000).