Washington was today under pressure to repeal recent legislation that governs how much profit banks can accrue from student loans after Citigroup said it would cease lending to some US universities.

The bank is the fourth lender to withdraw loans to students in a month, following its rival HSBC, in a market which is worth $85 billion a year.

Earlier today, Citigroup blamed increased lending costs for its decision which have risen amid the continuing disruption in the credit markets.

Their decision came amid further evidence of turmoil in America's housing market as US builders started the fewest number of homes for 17 years.

According to official numbers from the US Commerce Department, housing starts plunged 11.9 per cent, which equates to 947,000 new homes beginning construction last month.

Ian Shepherdson, at High Frequency Economics, described the statistics as "truly calamitous".

He added: "Since their sustained peak in summer 2005, single-family starts have dropped 61 per cent, almost as much as the 63 per cent drop after the 1978 peak. But this decline has been faster and there is no sign at all it is coming to an end. The inventory-to-sales ratio in the new home market has not yet clearly peaked and the overhang remains massive."

However, Wall Street was cheered by consumer price figures for March — a key measure of inflation. During last month prices rose 0.3 per cent, in line with expectations, boosted by a 2.3 per cent jump in household fuels and a 1.3 per cent increase in gasoline pump prices. Economists welcomed the statistics which showed overall that the weakening of the economy is depressing prices with clothing down 1.3 per cent.

The decision by Citigroup comes at a critical time for US university students who are expected this month and next to sift through their offer letters and choose which university to attend. Part of their decision is based on the cost of tuition and board at each university and funding arrangements that they can secure.

While Citigroup said that it hoped its move to withdraw new funding would be temporary, it provides new evidence that the turmoil that hit debt markets on Wall Street last summer is spilling over into the wider economy and making credit more difficult to secure for ordinary American households.

Michael Reardon, the chairman, president and chief executive officer of the Student Loans Company, a subsidiary of Citigroup, said: "These changes reflect the decisive action that is needed to manage our business through this difficult time in the overall economy. We continue to be well-positioned as an industry leader that is committed to delivering sustainable, profitable growth. Effective May 1, 2008, SLC will suspend lending at certain schools where loans with lower balances and shorter interest-earning periods result in unsatisfactory financial returns."

Banks have become reluctant to offer private student loans because worsening credit conditions have meant that they cannot package up the loans and sell them on.

Last October, Washington introduced legislation limiting the returns that banks could extract from student loans. All American students are entitled to a small federal loan to help pay tuition and boarding costs, but the sum is usually a very small proportion of total costs, and has to be topped up either with a private loan from a bank or with a bursary. While Ivy League universities such as Harvard have endowment pots estimated at $34 billion and very generous bursary packages, the majority of US universities and colleges have very limited funding.

In the academic year 2005-06, $17 billion in private student loans was used to finance higher education.

Several members of Congress have urged the Bush Administration to stabilise the market after the National Association of Independent Colleges and Universities gave warning that student loans have become far more difficult and costlier to obtain since the credit crisis.

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