Money Central: 50 tips to ride out a recession | House prices falling at record rate

British households face being squeezed even further in the run up to Christmas after banks admitted they will reduce the amount of credit on offer as worries over the economy persist.

A key report on credit conditions by the Bank of England today reveals that banks reduced lending to Britons and companies by more than they expected during the third quarter.

It added: "Lenders anticipated additional reductions in credit availability over the next three months".

Banks blamed the changing economic outlook and their expectations for the housing market for increasing the squeeze on households.

Nationwide Building Society this morning said that house prices fell 1.7 per cent last month to post their biggest annual drop since records began.

Prices sank for the eleventh consecutive month and are now 12.4 per cent lower than a year ago, with the average property worth £167,797, the lowest since February 2006.

Today's findings will add to pressure on the Bank of England's Monetary Policy Committee (MPC) to cut the interest rate when it meets next Wednesday and Thursday. It is hoped that the MPC will reduce the rate by a quarter point to 4.75 per cent.

Earlier this week, it emerged that activity in the UK manufacturing sector in September had slowed at its fastest rate in 17 years, while the Office for National Statistics confirmed that the economy had ground to a halt in the second quarter, prompting fears that Britain is heading for recession.

However, average pay rises have jumped to 3.8 per cent in the wake of rising inflation, according to Incomes Data Services, which may add to the argument against the MPC making a rate cut.

Today's report by the Bank of England also revealed that lenders has reduced the amount of unsecured credit they were prepared to make available to households.

Banks have tightened their lending criteria, cut back on credit card approvals and reduced the limits for borrowers.

The report said: "Looking ahead, lenders expected a further reduction in overall unsecured credit availability, which would be associated with a further tightening in credit scoring criteria and declines in approval rates."

Pressure on UK lenders shows no sign of abating and Prime Minister Gordon Brown is facing growing calls to support a €300 billion (£236 billion) bailout fund aimed at saving faltering banks across Europe.

Mr Brown will attend an emergency summit on Saturday, hosted by French President Nicolas Sarkozy, whose country holds the European presidency.

Silvio Berlusconi, the Italian Prime Minister, and Angela Merkel, the German Chancellor, will also attend the meeting.

But President Sarkozy's proposal was greeted with scepticism in Britain and outright hostility in Germany. It appears to involve the creation of a Europe-wide emergency fund that would be used to prop up banks when national governments are unable to intervene.

At the same time, Mr Brown is being forced to deal with growing hostility from UK banks at Ireland's unprecedented pledge to guarantee the debt and deposits of its six national lenders.

British lenders are fearful that UK savers will abandon domestic banks in favour of Irish institutions unless Mr Brown acts to lift the guarantee on deposits far above the current £35,000 limit.

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