Mortgage lending sunk to a three year low during August with just £21.8 billion advanced, the Council of Mortgage Lenders said today.
The CML blamed the slump on the "exceptionally low" housing market turnover, which has seen transactions drop by around 50 per cent compared with last year.
But it said remortgaging activity had also been lower than anticipated, adding that monthly lending figures looked set to remain subdued in the immediate future.
CML director general Michael Coogan said: "These figures reflect the heightened uncertainty for both lenders and consumers in the mortgage market at present.
"Lenders are uncertain about future sources of funding and the cost of funding, while consumers are unsure about how much further and for how long house prices will continue to decline."
Uncertainty in the market was increased this week with the announcement that Halifax Bank of Scotland was being taken over by Lloyds TSB.
HBOS is the UK's biggest mortgage lender, writing around one in five new mortgages during the first six months of the year.
The combined group will have a mortgage book that accounts for nearly a third of all outstanding mortgages in the UK.
But Lloyds TSB has not yet said if it will keep the HBOS brands, and it remains to be seen what impact the deal will have on competition in the mortgage market.
Meanwhile, house prices are continuing to fall, and there have been signs of a renewed reluctance among banks to lend to each other.
One of the key inter-bank lending rates has risen significantly since the beginning of the week, sparking concern that the recent trend among lenders to slash their mortgage rates could be coming to an end.
Howard Archer, chief UK and European economist at Global Insight, said: "This is yet more grim news on the housing market, with the very low level of mortgage activity for house purchases being a consequence of the ongoing toxic mix of stretched buyer affordability and very tight lending conditions.
"Widespread expectations that house prices will continue to fall markedly for some considerable time to come is also significantly limiting housing market activity, as is heightened concern over the economic outlook and job prospects.
"Furthermore, the current financial sector turmoil is likely to deepen the pressure on housing market activity through further tightening credit conditions and exerting upward pressure on interest rates."Reuse content