LONDON (Reuters) - British house prices fell in March at their sharpest pace since the recession of the early 1990s, the country's largest mortgage lender said yesterday, raising expectations interest rates will be cut this week.

Prime Minister Gordon Brown, whose popularity has slumped, quickly sought to calm fears of an economy on the slide, saying the decline was "containable" and a tiny reversal of the huge house price rises seen since his Labour government came to power in 1997.

House prices fell 2.5 percent during last month, the Halifax said, more than six times as much as analysts had forecast and the largest monthly decline since September 1992.

The surprisingly severe drop reinforced opinions that the housing market faces a bleak year as mortgage lenders grow more cautious and the credit crunch feeds through to households.

The annual three-month rate of house price inflation stood at 1.1 percent. Six months ago, that rate was in double figures.

"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," said Seema Shah, a property economist at researchers Capital Economics.

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

That will do little to boost Brown's popularity, which is at its lowest since he took power in mid-2007.

The pound fell and interest rate futures rose as the Halifax figures reinforced expectations the Bank of England will cut interest rates by 25 basis points to 5.0 percent tomorrow to shore up the economy despite simmering inflationary pressures.

"The overall impression is that house prices were buckling markedly even before the latest escalation of the credit crunch," said Howard Archer, an economist at Global Insight.

"The increasing danger of a sharp housing market correction heightens pressure on the Bank of England to cut."

Brown made the central bank independent in 1997 — a move coupled with a decade of steady growth that built his reputation as a safe pair of hands on the economy.

He has always avoided suggesting what the central bank should do but in unusually forthright remarks yesterday, Brown said interest rates could be cut because inflation was low.

"That's why people are forecasting that British growth will be higher than growth in other countries who are equally affected by what is happening," Brown said in a BBC interview.

Most economists expect house prices to fall this year as the credit crunch bites. All major lenders have withdrawn mortgages covering 100 percent of a property's purchase price as they grow more cautious and tighten up their terms.

Halifax said the price decline may be only slight due to strong economic fundamentals but that is unlikely to brighten the public mood as fears grow of a global economic downturn and a recession in the US.

With regional and London mayoral elections on May 1 and the ruling Labour Party falling behind a resurgent opposition Conservatives in opinion polls, Brown is unlikely to be able to rely on his economic reputation to woo voters.

A third of voters think he is worse than his predecessor Tony Blair, according to a Populus poll for The Times newspaper.

"The striking feature of the poll is the public's pessimism about the outlook for the economy and the current state of Britain," political commentator Peter Riddell wrote in The Times. "It is very hard to see this getting any better for Brown over the next year or so. (His) only hope is that the economic downturn will not be too severe or too long."