The credit squeeze for families and businesses looks set to intensify into 2009 despite unprecedented measures to recapitalise the banking system and get lending flowing again, a survey showed Friday.

A survey from Halifax, the country's biggest mortgage lender, showed house prices fell a record annual 16.2 percent last month. Bank of England figures showed mortgage approvals slumped to a record low in November and a survey of purchasing managers showed manufacturing activity contracted in December for an eighth month running.

"There's no let-up in sight," said George Johns, an economist at Barclays Capital.

The pound resumed its slide on the foreign exchanges and two-year gilt yields fell below 1 percent for the first time as traders bet the Bank of England will deliver another hefty rate cut next week.

Interest rates have already been slashed to 2 percent, their lowest level since 1951. With the economy battered by the worst financial storm for 80 years, markets are pricing in another cut of at least half a percentage point next Thursday.

"Today's weak data is likely to add to the list of reasons for the Monetary Policy Committee to cut aggressively next week," said Amit Kara, an economist at UBS.

Kara expects rates to be cut to just 1 percent next week and to 0.5 percent by March. Interest rates have never gone below 2 percent since the central bank was created in 1694.

VICIOUS DOWNWARD SPIRAL

Evidence that banks are still reining in lending will be embarrassing for the government which has pumped billions of taxpayers' money into the country's major banks in return for pledges that lending would be maintained.

Bank of England Governor Mervyn King has singled out bank lending as the single most pressing challenge facing policymakers and warned that banks may need further injections of money if financial conditions worsen.

The Bank's quarterly credit conditions survey showed lenders had reduced the availability of both secured and unsecured credit in the fourth quarter of last year and expected to cut back further in the next three months.

A vicious downward spiral -- in which falling house prices make banks reluctant to lend, pushing prices down further -- may prove difficult to break.

Halifax figures showed house prices fell by a record 16.2 percent year-on-year in the three months to December, taking them to their lowest level since August 2004. House prices have already shed some 20 percent from their 2007 peak, falling even faster than in the last recession of the early 1990s.

Moreover, the pace of house prices show no sign of slowing.

Mortgage approvals for house purchase -- a leading indicator of the market -- fell to just 27,000 in November, the lowest level since the series began in January 1999 and a third of its level a year ago.

"There's no end in sight to the pain in the housing market," said Matthew Sharratt, an economist at Bank of America.