House prices on course to fall by 12pc next year

The Halifax said the 1.1 per cent drop last month marked the first time since early 1995 that prices had fallen for three straight months. It was the biggest monthly drop since last December, it added.

If the trend continues at the current level, prices will fall by more than 12 per cent in the coming year.

Halifax economist Martin Ellis stressed the British economy was in good shape, but added: "The increase in interest rates between July 2006 and July 2007 has taken effect.

"Higher mortgage repayments and falling real earnings have put pressure on households' income, resulting in a slowdown in both house price growth and activity."

Pressure is piling on the Bank of England to start cutting interest rates tomorrow to prevent the economy lurching towards recession next year.

The Bank's Monetary Policy Committee meets today to discuss its lending rate decision at noon tomorrow against one of the gloomiest economic backdrops for more than a decade.

One measure published today from mortgage lender Nationwide shows consumer confidence dropping faster than at any time since 2004.

It comes after a bleak warning from the Financial Services Authority that 1.4 million homeowners will struggle to refinance their mortgages next year because of the "very real prospect" that the global credit crunch will get worse. However, most economists in the City believe that the Bank will hold rates again at 5.75 per cent tomorrow because of fears about inflation, fuelled by record oil prices, leaping ahead of its two per cent target.

The first of several forecast cuts next year is expected in January, or more probably, February.

The high street is braced for a tough Christmas with worsening trading to follow in the New Year as consumers struggle to make credit card payments. Economic growth next year is now expected to slow from the near three per cent earlier forecast to little more than two per cent.

There are as yet no mainstream economists predicting a recession, but many fear that the risk is there for the first time in more than 15 years, particularly if the fallout from the US credit squeeze continues.

In the London money markets, one-month sterling interest rates for loans between banks rose to a nine-year high yesterday, an indicator of how alarmed the banks are about lending.

But Clive Briault, the head of retail markets at the FSA, said yesterday that banks should "assume that market conditions will remain very difficult for a sustained period".

He urged them to ensure that they had adequate levels of liquidity, despite the higher costs involved at present. "It would be prudent to pay a correspondingly high price - and to forgo some profits - to secure this protection, or otherwise to scale back balance-sheet growth," he said.