LONDON (Reuters) – British house prices fell last month and retail sales growth slowed abruptly, surveys showed yesterday, hitting the pound and raising concern that the recovery may be losing momentum.

A narrower trade deficit was the one bright spot in an otherwise gloomy batch of data, but even here analysts noted that weaker domestic demand could be holding back imports.

The signs of a faltering recovery highlight the dilemma facing the Bank of England, which has kept interest rates at a record low for more than a year despite\ above-target inflation.

The central bank will publish updated quarterly forecasts today that could make for unpalatable reading. Not only is it likely to revise down its 2011 growth forecasts, largely as a result of the fiscal tightening announced in the government's June budget, it is also likely to admit inflation will stay above target for a second straight year.

"Today's data releases are not good news for growth," said Alan Clarke, UK economist at BNP Paribas. "The consumer was already facing a challenging year, and a renewed housing downturn will only add to that." The Royal Institution of Chartered Surveyors' house price balance logged its first negative reading in a year, falling to -8 in the three months to July from a downwardly revised +8 in the three months to June.

Worryingly, surveyors were bracing for even worse to come, with the price expectations balance falling from -6 to -28, its lowest since April 2009.

Sterling fell one percent on the day versus the dollar in the wake of the data, touching a one-week low of $1.5736.

Falling house prices would put further pressure on banks' balance sheets, crimping their ability to lend to households and businesses. With many Britons mortgaged to the hilt, consumer confidence would also take a knock.

A survey from the British Retail Consortium showed the value of sales last month was just 0.5 percent higher than a year ago on a like-for-like basis, less than half the 1.2 percent growth recorded in June. "The overriding factor is consumer confidence — it's fallen recently," said Stephen Robertson, Director General of the BRC.

"Talk of public spending cuts is unsettling customers and they are concentrating on essentials."

Britain's economy grew an unexpectedly strong 1.1 percent from April to June but most economists think that will be the high water mark, with growth slowing for the remainder of the year.

A narrowing in Britain's trade gap in June provided a glimmer of hope that an export-led recovery might still be possible. But analysts were sceptical whether exports could suddenly become the engine of British growth, particularly when the global recovery was also looking fragile.

"We continue to doubt that any trade boost will be big enough in the near term to offset the effects of the severe fiscal squeeze on consumers and the domestic economy," said Vicky Redwood at Capital Economics.

The Bank of England has kept UK interest rates at a record low of 0.5 percent since March 2009. With the economic outlook so uncertain, investors are betting this policy paralysis will continue until well into 2011.