Thousands of Britons face losing their dream homes in Spain as the country's property market lurches from paralysis into freefall.

With prices estimated by one survey to be falling by 20 per cent and credit increasingly hard to come by, last week Martinsa-Fadesa, one of the country's largest homebuilders, said that it could not keep up its payments and filed for protection from its creditors - the latest and largest property company to take such a drastic step.

The company, which has sold hundreds of thousands of holiday homes, has vowed to complete the 12,500 homes that have already been paid for - in many cases by British people - but analysts fear that may be optimistic, despite the personal fortune of Fernando Martín, the company's multimillionaire owner and the former president of Real Madrid, one of the world's biggest football clubs.

“It's obviously bad news,” Mark Stucklin, director of Spanish Property Insight, a property information website, said. “They are in Chapter 11 and could conceivably come out of it more or less intact, but it's definitely not a good sign.”

Martinsa, which last year borrowed heavily to take over Fadesa, was hit by the general downturn in the housing market and poor sales, as well as the fact that it had taken on a mountain of debt that it could no longer roll over because of the credit crunch.

After months playing down the seriousness of Spain's economic problems, Pedro Solbes, the Finance Minister, admitted last week that the country was in deep trouble. “This is the most complex crisis we have ever experienced,” he said.

Mr Solbes believes that public money should not be used to bail out companies such as Martinsa, which have taken what he called excessive risks. “It would be hard to justify the use of taxpayer money to solve the problems of a private company that has had a run of bad luck,” the minister said.

Consumer spending and construction - the twin engines that have kept Spain's economy humming for 14 years - have been hit hardest by the slowdown. Economic growth, averaging about 4 per cent a year, is projected to slow to below 1 per cent this year. Many economists believe that a recession is likely this year or next.

Spaniards have been hammered on several fronts. The Euribor - the interbank interest rate used to set mortgage rates - has hit a record high of 5.4 per cent. Some surveys say that Spaniards are now spending nearly half their income on mortage costs and it is much more difficult to get a loan or a mortgage. Inflation has hit 5 per cent a year as fuel and food prices rise. British people have been hit further by the pound's decline against the euro - it has lost more than 15 per cent in value over the past year.

Analysts agree that the housing market must go through a correction. The International Monetary Fund says that Spanish house prices are as much as 20 per cent overvalued and it expects them to come back into line over the next few years.

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