House prices across the UK dived by 2.5% during March, their biggest monthly fall since the 1990s house price crash, figures showed today.

Britain's biggest mortgage lender Halifax, part of the Edinburgh-based HBoS group, said the drop was the largest since September 1992.

However, prices in Scotland increased by 5.3 per cent in the last year according to the research.

This was the largest increase of all the UK regions. Over the last three months house prices in Scotland are up 0.2 per cent, which does signal a further cooling of the market.

The average house price in Scotland is £ 145,531, which is £46,025 below the UK national average of £191,556.

UK-wide house prices are now just 1.1% higher than they were a year ago, the slowest rate of annual growth for 12 years.

Martin Ellis, Halifax chief economist, said: "This fall is continuing the pattern whereby the market is readjusting. Sellers are having to adjust the price they ask for their properties."

But he said the group still expected there to be only a "modest fall" in house prices for the whole of 2008.

He added that the most recent drops needed to be seen in the context of house price gains of the 51% during the past five years and rises of 171% during the past 10 years.

Mr Ellis said: "Sound economic fundamentals are supporting house prices. A strong labour market, low interest rates and a shortage of new houses underpin housing valuations.

"Our research shows that the labour market is the key driver of the housing market. Employment is at a record high and unemployment continues to fall."

The group said homes had lost 1% of their value during the first quarter of 2008, to leave the average property costing £191,556.

But there has been huge regional variation within this figure, with house prices in the West Midlands falling by 5% during the first three months of the year, while property prices have dropped by 4.7% in Wales and by 2.6% in the South West.

There were also price falls of 1.5% in Northern Ireland and drops of 0.5% in both Yorkshire and the Humber and the North West.

But at the other end of the scale house prices rose by 2.2% in the East Midlands, 1.6% in Greater London and by 1.4% in East Anglia.

House prices are now lower in three regions of the country than they were a year ago, with the average home costing 5.3% less in Wales, 3.7% less in the West Midlands and 3.3% less in the South West.

The Halifax figures are in line with ones reported by Nationwide Building Society for April, which showed house prices falling for the fifth consecutive month, dropping by 0.6% to leave annual house price growth at just 1.1%.

Howard Archer, chief UK and European economist at Global Insight, said: "It is important not to put too much emphasis on one piece of data, and it should also be borne in mind that house prices were still only down 1.0% quarter-on-quarter in the first quarter of 2008.

"Nevertheless, the overall impression is that house prices were buckling markedly under the substantial pressure emanating from increased affordability constraints and markedly tighter lending conditions even before the latest escalation of the credit crunch."

He said the increasing danger of a sharp housing market correction heightened the pressure on the Bank of England to cut interest rates by a further 0.25% to 5% this Thursday.

He added that the group had now increased its forecast for house price falls in 2008 from drops of 5% during this year and next year to falls of 7% in 2008, followed by a further 8% drop in 2009.

Seema Shah, property economist at Capital Economics, said: "The stunningly large drop in house prices in March is the second largest in the history of the Halifax index, beaten only by the fall recorded in 1992 when the housing market was in the grips of a full-blown crash.

"There is a clear risk that this housing market correction will be sharper and deeper than we currently expect."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The sharp fall in the Halifax house price index in March highlights the growing pressure on the residential market as lenders continue to scale back their activity in the market.

"Loan to value ratios are being lowered at the same point as borrowing rates are being raised putting increasing pressure on first-time buyers who are having to find ever larger deposits.

"There is moreover a real risk that year-on-year house price inflation will turn negative over the next month or two. This will compound the negative newsflow on the housing market."