House prices fell in March at their sharpest pace since the recession of the early 1990s, the country's largest mortgage lender said on Tuesday, raising expectations that interest rates will fall this week.

House prices fell 2.5 percent month-on-month in March, Halifax said, more than six times the drop analysts had predicted and the largest monthly drop since September 1992.

That took the annual three-month rate of house price inflation down to 1.1 percent, less than half the expected level, and the average house price to 191,556 pounds.

The pound fell and interest rate futures rose as the surprisingly weak figures reinforced growing expectations that the Bank will trim interest rates by 25 basis points to 5.0 percent on Thursday.

"The overall impression is that house prices were buckling markedly even before the latest escalation of the credit crunch," said Howard Archer, an economist at Global Insight. "The increasing danger of a sharp housing market correction heightens pressure on the Bank of England to cut interest rates.

Most economists expect house prices to fall this year as the credit crunch bites into the real economy. All the major lenders have now withdrawn mortgages covering 100 percent of a property's purchase price as banks grow more cautious and tighten up their terms.

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But Halifax said the price decline may be only slight due to "strong economic fundamentals".

"We expect there to be a modest fall in UK house prices this year," said Martin Ellis, chief economist at Halifax. "Any declines, however, should be viewed in the context of the significant price rises over recent years. The average price has risen by 120,860 pounds during the past decade from 70,696 pounds to 191,556 pounds -- an increase of 171 percent."

Last month, house prices fell 0.4 percent on the month, leaving them 4.2 percent higher in the previous three months compared with a year earlier, Halifax said.

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