Home loan approvals have nosedived at their sharpest annual rate to hit a record low in May, fuelling more fears of a house price crash.

As house prices fall at monthly rates not seen since the slump of the early 1990s, the number of mortgage approvals accepted by the UK's biggest banks dropped to 27,968 during the month from 34,752 in April.

The credit crunch has forced banks to toughen up lending terms, making it harder for people to obtain affordable mortgages.

Economists worry that a housing market meltdown will drag the economy into recession at a time when the cost of living is rising fast as food and fuel prices soar on global markets.

Michael Hume, an economist at Lehman Brothers investment bank, said: "A very worrying picture of how the credit crunch is unfolding. A US-style housing slump looks increasingly likely.

"The drop in mortgage approvals and lending points to a housing market that is rapidly grinding to halt under the pressure of higher mortgage interest rates, tighter bank lending standards, and declining confidence."

Despite three cuts in official interest rates to 5 per cent since December, banks have actually been raising rates on their mortgage deals because the credit crunch has made it harder for them to get hold of cheap funding on financial markets.

The amounts that banks have already lent to customers is also starting to come off the boil, with mortgage lending rising by £4.0 billion in May, down from a £5.2 billion increase in April and the weakest rise since October 2007.

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