Fewer mortgages were approved for house purchase in December than in any month since the Bank of England started collating these seasonally adjusted numbers in their present form in 1999.
Banks and building societies gave the go-ahead to only 73,000 house purchase loans last month, down sharply from a downwardly revised 81,000 in November and an average of 100,000 over the previous six months.
The average value of these mortgages approved also slipped back to £139,700 from a recent average of £145,000, confirming surveys showing that house prices have started to fall in an increasingly quiet market.
Re-mortgages approved, by contrast, increased in both number and value as home-buyers shopped round for better deals, so that the total number of approvals for all purposes fell by only 10,000 to 226,000, while the average value rose to £112,400 from a recent average of £110,000.
The total net value of mortgages paid out during December rose for a second month to £8.6 billion, up from £8 billion in November and £7.9 billion in October.
But approvals are seen as a more up-to-date pointer to the trend.
Howard Archer, UK economist at Global Insight, interpreted them as "striking evidence that housing market activity is now being substantially undermined by both stretched affordability and tightening lending practices".
He said: "This adds to the already intense pressure on the Bank of England to cut interest rates next week."
The consultants now expect house prices to fall by five per cent this year and to remain muted in 2009. They were previously looking for a three per cent dip.
Mr Archer also warned of "a very real danger" a sharp correction in house prices, particularly if unemployment rises, forcing home-owners to sell, while buyers hold back hoping to pick up a better bargain later.
Vicky Redwood, UK economist at Capital Economics, took a similar view. "There is growing evidence that despite the recent fall in interbank lending rates, the damage of the credit crunch has already been done," she said. "The question now is not whether house prices will fall, but how much they will fall."
Consumer credit also weakened markedly last month, rising by £557 million, the smallest increase since last April and half the recent average. Within that, credit card lending rose by £300 million, slightly less than in November.
Separately, a survey from Citigroup/YouGov showed inflation expectations for the next 12 months spiked to a record high 3.3 per cent in January from 2.7 per cent in December.
"These results are bound to alarm the Bank of England," Citigroup/YouGov said.