By Agnes Lovasz Oct. 2 (Bloomberg) -- The pound fell against the dollar for a fourth day after house prices dropped in September by the most since at least 1991, giving the Bank of England more reason to lower interest rates to avert a recession. The pound also declined versus the yen after Nationwide Building Society said in a report that the average cost of a home plunged 12.4 percent from a year earlier. U.K. financial institutions plan to scale back loans to companies and households for the rest of the year, threatening to deepen the slump, according to a central bank survey released today. ``A tightening of credit conditions is one possible catalyst for a rate cut next week,'' said Adam Cole, head of global currency in London at Royal Bank of Canada. ``When global growth is disappearing, markets are prepared to pay a premium where central banks are proactive in supporting growth.'' The U.K. currency dropped to $1.7641, from $1.7697 yesterday, and traded as low as $1.7608, the weakest since Sept. 12. It was at 78.87 pence per euro, from 79.16 pence, and 185.90 yen compared with 187.11 yen. The worst banking crisis since the Great Depression has forced the sale of HBOS Plc, the U.K.'s biggest mortgage lender, prompted the government to seize Bradford & Bingley Plc and led the Bank of England to offer emergency funds to money markets. Banks reduced the availability of credit in the third quarter by more than they had anticipated and they predict it will become scarcer as both supply and demand for loans drops, the central bank said today in its quarterly survey of lending conditions. `Positive for Pound' Slowing growth will spur policy makers to lower the nation's key rate in the fourth quarter to 4.75 percent from 5 percent, according to the median forecast of economists in a Bloomberg survey. The next decision is scheduled for Oct. 9, when the central bank will probably keep the rate on hold, according to a separate survey. ``Lower U.K. rates would be a positive for the pound in the way lower U.S. rates have been positive for dollar this year,'' said Cole. ``The sooner we get on with it, the better it will be for the currency.'' The pound will rise to 77 pence per euro and drop to near $1.70 by year-end, according to Cole. The implied yield on the March short-sterling futures contract fell 5 basis points today to 4.78 percent as traders added to bets policy makers will lower borrowing costs in an effort to revive Europe's second-largest economy. The rate was at 5.07 percent at the end of last week. Gilts Decline U.K. government bonds fell, with the yield on the two-year note rising 1 basis point to 3.96 percent. Bond yields move inversely to prices. Britain entered a recession in July, according to forecasts by the European Commission and the Confederation of British Industry, the country's biggest business lobby. An industry report yesterday showed manufacturing contracted last month at the fastest pace in 16 years amid a credit squeeze that has crippled bank lending. The government also said services-industry growth stalled in the three months through July for the first time in six years. ``The U.K. economy is on the brink of a recession,'' Ben Eldred and Katherine Dann, economists in London at Daiwa Securities SMBC Co., wrote in a research report. ``A move next month does look to be on the cards now, and this will herald an aggressive easing of policy through 2009.'' To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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