Concerns over the health of the UK housing market grew and expectations of further interest rate cuts surged yesterday as building society Nationwide reported residential property prices had fallen for a second consecutive month for the first time since 2000.

Nationwide said the average house price dropped by a seasonally-adjusted 0.5% this month to £182,080, following a 0.8% drop in November.

A spokeswoman for the UK's biggest building society said that prices had not shown back to back monthly falls since the four straight decreases between May and August 2000.

Howard Archer, chief UK economist at consultancy Global Insight, said: "It is clear that the housing market ended 2007 under mounting pressure from increased affordability pressures and tightening lending practices, and it looks set for further deterioration in 2008. The rising risk that the housing market could be headed for a sharp correction maintains pressure on the Bank of England to trim interest rates again early in 2008."

The December drop cut Nationwide's annual rate of UK house price inflation further, from 6.9% in November to 4.8% in December. This is the weakest figure since summer 2006 and less than half of the year-high of 11.1% recorded in June this year.

Nationwide's survey provided further evidence that the global credit crunch, triggered by massive default on home loans by US householders served by the sub-prime mortgage sector, is hitting home on this side of the Atlantic as UK lenders increase their interest rates and tighten lending criteria.

It followed hard on the heels of figures on Thursday from the British Bankers' Association showing that the number of fresh mortgages approved in the UK by the big banks for house purchase in November was down 43.5% on the same month last year.

Sterling tumbled to fresh record lows against the euro again yesterday. The single currency, which was launched in 1999, had by last night jumped to 73.87p, up 0.6p on the day.

The pound has been hitting record lows against the single currency with great regularity since last Friday - when it fell through its previous all-time trough hit in 2003.

Sterling's dive against the euro, caused by rising expectations of possibly heavy cuts in UK interest rates at a time when another rise in eurozone rates could be on the cards, has since late July made eurozone countries 10% more expensive for visitors from the UK.

In contrast, sterling has been making gains against the dollar in recent days. The greenback has been hit hard by growing worries over the US economy's ability to absorb an American housing market slump. Sterling edged back above $2 during trading yesterday, touching $2.0022. It had by last night retreated to about $1.9917 - still up more than one-quarter-of-a-cent on the day.

The Bank of England's Monetary Policy Committee cut base rates by a quarter-point to 5.5% on December 6, with signs of a greater-than-anticipated slowdown in the UK housing market at that stage having been one of several key factors in this decision.

Surveys of UK house prices and mortgage approval numbers have since been even weaker.

The Nationwide survey showed house prices grew by only 0.9% in the fourth quarter of this year, compared with the preceding three months. This represented a sharp slowdown in the three-month-on-three-month growth rate from 1.4% only in November, and was the weakest such increase since November 2005.

Archer is forecasting a relatively modest 3% fall in UK house prices next year, although he had expected them to be flat until recent signs of weakness emerged. He expects prices to "remain muted for an extended period beyond 2008".

However, Archer sees a mounting risk that the fall in house prices could be more severe.

He said: "There is undeniably a very real and growing danger that the housing market could see a sharp correction next year. Probably the biggest risk is that the economy slows sharply over the coming months and unemployment starts rising significantly. This would be liable to lead to a marked increase in the number of people having to sell for distressed reasons, particularly given the extent to which many households have had to stretch themselves to the limit to buy a house.

"At the same time, a weak economy and rising unemployment would be likely to substantially dilute housing demand through reducing people's ability to buy a house."

Acknowledging the danger of a self-fulfiling prophecy, Archer added: "A sharp housing market correction could also be triggered if both sellers and buyers start expecting prices to fall sharply. This could prompt a flood of sellers putting their houses on to the market to try and sell their houses before prices fall markedly, while at the same time prospective buyers hold off in the expectation that prices will fall. Under such circumstances, a growing surplus of supply over demand would undermine prices."