The omens of UK recession continued to amass yesterday when it emerged banks intend to reduce lending to households and businesses still further.

The portents of UK recession continued to amass yesterday when it emerged banks intend to reduce lending to households and businesses still further as bad debts mount.

Banks' ever more cautious attitude towards lending was spelled out in a survey published by the Bank of England which, along with news yesterday from building society Nationwide of a further tumble in UK house prices in September, piles on pressure for a cut in benchmark interest rates.

Even more worryingly, most of the Bank of England survey was conducted before the latest meltdown in wholesale credit markets triggered by US investment bank Lehman Brothers' September 15 con-firmation that it had collapsed. The survey was conducted between August 26 and September 17.

The survey showed banks and building societies collectively cut the availability of mortgage finance and un-secured credit to households further in the three months to mid-September - by even more than they had anticipated in early summer.

These lenders attributed their behaviour to "expectations for house prices and concerns about the economic outlook".

Nationwide said yesterday that the average UK house price had fallen by a further, seasonally-adjusted 1.7% in September to £161,797, the 11th consecutive monthly fall. The average house price last month was 12.4% lower than in September last year - the biggest year-on-year fall since comparable records began in 1991.

Yesterday's Bank of England credit conditions survey showed banks and building societies expected to reduce yet further the availability of mortgage finance and unsecured loans to households in the quarter now under way.

The survey noted lenders had tightened credit-scoring criteria and reduced loan-to-value ratios on home loans. But for borrowers seeking loans of less than 75% of their house's value, the survey found that availability of credit actually increased.

Banks and building societies noted default rates on mortgages, and losses resulting from such delinquent home loans, had both increased in the three months to mid-September.

Lenders commented that "deteriorating economic conditions had contributed to payment difficulties for some households".

The survey showed lenders rejected a greater proportion of applications for unsecured loans and credit cards.

Lenders reported that they had reduced limits on credit cards by more than they had expected three months earlier.

The decline in availability of unsecured credit was attributed to "concerns about the economic outlook and a reduced appetite for risk" among lenders.

The survey found that default rates on unsecured lending increased during the three months to mid-September by more than had been expected in early summer.

Losses associated with such default also rose.

Both defaults and associated losses were expected to increase further.

Lenders reduced overall credit availability to the corporate sector during the three months to mid-September by even more than they had expected in early summer.

Maximum credit lines were reduced and more collateral demanded from corporate customers, while loan covenants were also made stricter, lenders reported.

Lenders also said that changing funding conditions had contributed to the decline in credit being made available to the corporate sector.

Companies are expected to suffer a further reduction in credit availability in the current quarter.

The default rate on loans to corporates and associated losses both increased in the three months to September. However, the rise in losses on problem loans was less than feared.

Lenders predicted a further rise in corporate bad debts.

There was a further cut-back in lending to the commercial real estate sector in the three months to mid- September, and this reduction was greater than predicted in early summer.

The credit conditions survey, combined with elevated interbank lending rates, heap pressure on the Bank of England's Monetary Policy Committee to attempt to ease the situation by cutting benchmark UK interest rates.

That said, the three quarter- point cuts it implemented between December last year and this April failed to alleviate matters and the Lehman collapse has triggered a fresh wave of trouble in interbank markets.

The British Bankers' Association's London Interbank Offered Rate for three-month sterling stood at 6.2775% last night. This is more than one-and-a-quarter points above the Bank of England base rate.

The MPC has held UK base rates at 5% since April.

David Blanchflower, arch-dove on the MPC, voted for a half-point cut in September when the other eight committee members voted for no change. Tim Besley, resident MPC hawk, abandoned his campaign for a rise in base rates.

The European Central Bank held benchmark interest rates in the 15-nation eurozone at 4.25% yesterday. But ECB president Jean-Claude Trichet has now abandoned his hawkish rhetoric-raising hopes of a near-term cut.

Trichet said ECB policy-makers recognised the extra-ordinarily high level of uncertainty around the economic outlook stemming from the latest turmoil in global financial markets. "Economic activity in the euro area is weakening, with contracting domestic demand and tighter financing conditions," he said.

Trichet revealed that the ECB's Governing Council discussed cutting interest rates at its meeting yesterday.

Trichet said. "To make our decision we had examined two options - to keep interest rates unchanged; the other one (was) decreasing interest rates. Our conclusion is that we were right in keeping interest rates as they are."

The euro fell to a seven-week low against the pound yesterday on the more dovish tone from the ECB. The single currency was last night trading around 78.35p - 0.66p lower than its close in London on Wednesday. It touched an intra-day low of 78.28p. In contrast, the pound fell against the dollar. Sterling was last night down more than one-and-a-quarter cents on its Thursday close in London at $1.7657.

The Office for National Statistics confirmed on Tuesday that the UK economy had failed to grow at all in the second quarter of this year for the first time since the second quarter of 1992.

The European Commission and Organisation for Economic Co-operation and Development forecast the UK will fall into recession in the second half of this year with two consecutive quarters of falling output.

Capital Economics said yesterday's credit conditions survey showed that "even if the problems in the financial markets were solved overnight, which is unlikely, the impact of the credit crisis on the real economy will be with us for some time".