Struggling consumers and home-buyers face being squeezed further in the build-up to Christmas after banks said that they would make loans even harder to secure.

Lenders have already cut the flow of funds to customers through credit cards, personal loans and mortgages by more than they had expected to over the past three months, according to the Bank of England.

Now high street banks have said that they intend to rein in their lending even further before Christmas, which will leave more families fighting to make ends meet, and fuel the downturn in the economy.

The revelations came as quarterly figures showed the value of the average home at £165,188, 10.3 per cent lower than in the third quarter last year. The monthly figures are even worse, with the September 2008 average of £161,797 a 12.4 per cent drop on September last year and the sharpest annual fall for 17 years.

Nationwide Building Society, which compiled the report, said that prices were falling faster in the South of England than in the North because of the uncertainty surrounding the financial strength of the City.

The Government’s latest figures also show that the number of households suffering fuel poverty in England alone is expected to rise to 3.5 million by the end of the year. The Government has pledged to eradicate fuel poverty – defined as a household spending more than 10 per cent of its income on heating - by 2010.

The banks blamed the growing shortage of credit on the fear that many more loans will go bad. Over the past three months banking groups reported a sharper than expected surge in the number of consumer borrowers unable to keep up repayments.

Lending is also drying up as banks struggle to raise funding in paralysed money markets and cut back radically on the risks they take.

City experts said that borrowing could become even harder than lenders have admitted, since the Bank of England quarterly survey of credit conditions released yesterday was carried out before the past two weeks of financial turmoil.

Almost 40 per cent more lenders told the Bank that the availability of secured loans such as mortgages had grown worse in the past three months than said it had improved; 17 per cent more lenders said that secured loans would be harder rather than easier to come by in the next three months.

Even scarcer finance for prospective buyers would threaten to send house prices into freefall.

For the first time the housing market slump has affected the ultra-wealthy, according to Knight Frank, the upmarket estate agent. It said that “super-prime” homes in London, which had been in demand from Russian and Middle Eastern tycoons, had dropped by 1.7 per cent last month, the first fall in the sector.

The average price of a home in London was 9.4 per cent lower than in the third quarter last year, according to Nationwide. They also said that Northern Ireland recorded the worst year-on-year decline at 29.8 per cent, while Scotland was the most robust region, recording a 7.1 per cent drop.

Demand for mortgages, according to the Bank of England survey, is also drying up as potential buyers abandon attempts to find a home loan and bet on much lower house prices in future.

Even bigger cuts in the availability of unsecured borrowing promises harder times for retailers. Stores are likely to experience the toughest Christmas trading season for decades.

City economists said that a vicious downward spiral was gaining strength as the economy’s woes led to more bad loans, making banks ever more reluctant to lend.

The grave results in the Bank’s survey added to pressure for its interest-rate setting committee to cut base rates when it meets next Thursday. A growing number of economists expect that the Bank’s Monetary Policy Committee will move to lower borrowing costs, although many more believe it will wait at least until next month.

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