Persimmon sent shares in London tumbling today after it shelved the building of new homes and warned the housing slump was deepening.

Britain's largest housebuilder said the "unprecedented tightening in the mortgage market" has savaged business in the past three weeks as banks and building societies rein in lending.

It also postponed building homes on new sites until the mortgage market improves, prompting fears of a housing shortage, particularly in London and the South-East.

Mortgage companies have withdrawn their best rates and even stopped accepting new business as the credit crunch bites. Figures yesterday showed the number of mortgages taken out last month fell by nearly 50% to a record low.

The ¸ber-bearish update from Persimmon shocked the City, and shares tumbled 59p to 591p, a fall of 9%. It sparked a sell-off across the sector with Barratt Developments down 47½p to 283½p, Taylor Wimpey off 15p to 130½p and Redrow 20p lower at 254p.

The carnage spread to the wider market, sending the FTSE 100 index down 111.5 points to 5972.1 while the FTSE 250, home to many of the nation's house-builders, was down 184.9 to 9902.8.

Industrial property firm Brixton, which owns warehouses around Heathrow, added to the gloom when it warned of growing negative sentiment in the economy. The shares fell 9½p to 297p. At today's annual meeting at York racecourse, Persimmon chairman John White told shareholders: "Over the last three weeks, the unprecedented tightening in the mortgage market has caused a further deterioration of the housing market leading to lower sales volumes and increased cancellation rates.

"At the same time, the backdrop of extensively reported concerns about the global credit crisis continued to undermine consumer confidence.

"As a result, an increase in discounting, marketing costs and incentives are being utilised in the market to compete for the reduced level of demand and this is having a negative impact on margins.

"Whilst we continue to focus on achieving the best possible selling price in every location it is likely that, with the continuation of current conditions, the market will become more challenging."

Sales volumes are down 18% so far this year while revenues have slumped 24% to just £1.37 billion as Persimmon slashes prices.

Merrill Lynch analyst Mark Hake, a one-time bull of the sector who this week cut the ratings of a host of house-builders, said it was a "very cautious statement".

Simon Brown of Landsbanki lowered his 2008 pre-tax profits forecast to £265 million from £440 million. In February, Persimmon reported 2007 profits of £582.7 million.

Persimmon warned it was "difficult to predict when the market will improve" because of "the uncertainties of the global economy and the UK lending environment". It also called for stamp duty thresholds to be raised and urged the Bank of England to cut interest rates in an effort to bolster the market.