One of London's biggest estate agencies today warned house prices in the capital could drop by as much as a quarter.

Savills said the continuation of the credit crunch would trigger a 25% fall in prices before the end of next year. It also warned of a sharp reduction in the number of homes being built.

It was Savills' most negative outlook yet for the housing market and fuelled fears Britain is heading towards a crash. Economists are warning interest rates may rise this summer - pushing the price of mortgages ever higher.

Director of residential research Lucian Cook said there had been a shift from "credit squeeze to credit crunch to credit crisis".

He said the housing market had moved from "slowdown to downturn" and added: "The risk of a far more severe correction cannot be ignored."

Cook said: "The driving force behind these falls has been the ongoing credit crisis, which has significantly reduced accessibility to mortgage finance and prevented recent base rate cuts from being passed on to the consumer.

"This has occurred against a backdrop of a weakening outlook for economic growth and reduced buyer confidence."

Savills thinks prices in London will fall 10% this year and 4% next year.