Britain's biggest lender Halifax said the average cost of a home dropped by 2.5 per cent during the month, the biggest monthly fall since September 1992 and the second largest drop ever.
Annual house price growth also slowed to just 1.1 per cent, its lowest level for 12 years, meaning property prices are now falling in real terms on an annual basis.
Drops in the cost of property were even more dramatic on a regional basis, with house prices in the West Midlands falling by 5 per cent during the first three months of the year, while the average cost of a home has dropped by 4.7 per cent in Wales and by 2.6 per cent in the South West.
Annual house price growth has also turned negative in three regions, with prices 5.3 per cent lower in Wales than they were a year earlier, while they have fallen by 3.7 per cent in the West Midlands and 3.3 per cent in the South West during the past 12 months.
The housing market has been coming under increasing pressure in recent months due to a combination of the problems in the mortgage market and stretched affordability following previous strong price growth.
Figures from the Council of Mortgage Lenders, also released today, showed that the number of mortgages taken out by people buying a home fell for the fourth month in a row during February to reach a new low.
Just 49,000 home loans were advanced to people buying a property during the month, 30 per cent less than in February last year, and the lowest figure since the group first began to collect data in this format in 2002.
The CML said the February figures related to completions of transactions started several months ago, and warned that the ongoing tightening in lending criteria would lead to further falls in new business going forward.
The mortgage market is changing on a daily basis, as lenders raise their rates and increase the deposits they demand, making it harder for people to borrow the sums they need to buy their first home or trade up the property ladder.
Hard-pressed first-time buyers were dealt a further blow today when Abbey announced it was withdrawing from the 100 per cent mortgage market.
The group had been the only mainstream lender still offering mortgages to people without a deposit.
Its exit leaves only Bank of Ireland and Bristol & West, which are part of the same group, offering 100 per cent mortgages, although these deals need to be taken out with a parent or close relative.
There are now just three different 100 per cent loans available, down from 123 a year ago, while the number of 95 per cent mortgages has more than halved during the past 12 months.
Across the whole mortgage market there are now only 4,065 different products available, down from 5,392 at the beginning of last week and 15,599 in July last year before the credit crunch first hit.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "The sharp fall in the Halifax house price index in March highlights the growing pressure on the residential market as lenders continue to scale back their activity in the market."
Howard Archer, chief UK and European economist at Global Insight, said it was important not to put too much emphasis on one piece of data.
But he added: "Nevertheless, the overall impression is that house prices were buckling markedly under the substantial pressure emanating from increased affordability constraints and markedly tighter lending conditions even before the latest escalation of the credit crunch."
He added that he had increased his forecast for house price falls in 2008 from drops of 5 per cent during this year and next year to falls of 7 per cent in 2008, followed by a further 8 per cent drop in 2009.
He said: "Current rapidly deteriorating sentiment over the housing market also heightens the risk that house prices could fall more sharply over the next couple of years.
"Indeed, there is now a very real danger that a drop of more than 20 per cent in house prices could occur over the next couple of years."
But Martin Ellis, Halifax chief economist, said the group still expected there to be only a "modest fall" in house prices for the whole of 2008.
He said: "Sound economic fundamentals are supporting house prices. A strong labour market, low interest rates and a shortage of new houses underpin housing valuations.
"Our research shows that the labour market is the key driver of the housing market. Employment is at a record high and unemployment continues to fall."
The gloomy data on the housing and mortgage market increases the likelihood that the bank of England will cut interest rates by a further 0.25 per cent to 5 per cent on Thursday.
But new borrowers are unlikely to feel much of the benefits of any reduction, as base rates would have to fall by 0.75 per cent just to put mortgage rates at the level they would normally be at if interest rates were at 5.25 per cent.
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