Gross mortgage lending fell last month from September's two-year peak, adding to expectations that already stagnant house prices are likely to fall as the economy weakens.
Figures from the Council for Mortgage Lenders estimated that gross lending was £13.1bn in October, down 4 per cent from the previous month.
Lending was 13 per cent up on a year earlier but the figure was boosted by remortgaging as borrowers snapped up fixed-rate deals at near record lows. Lending is still far down on activity levels seen before the recession. The third quarter's £39.4bn of gross lending was well below the £60.7bn in the same period of 2008.
The October lending number covered a month when a barrage of gloomy indicators hit consumer confidence at a time of rising unemployment, high inflation and chaos in the eurozone. Banks also struggled to fund their loans as money markets froze over because of fears about the eurozone crisis.
Although interest rates are not expected to rise until 2013, this reflects weakness in the economy that is likely to dampen demand in the housing market. Howard Archer, an economist at IHS Global Insight, said: "We see house prices falling by around 5 per cent by mid-2012. Furthermore, we believe that there are mounting downside risks to this forecast.
"We suspect that squeezed purchasing power, a now markedly weakening labour market and major concerns over the economic outlook will limit potential buyers and weigh down on house prices. And there is a very real danger that banks' future ability to lend to homebuyers could be hit by difficult wholesale funding conditions."
The CML economist Bob Pannell argued that the underlying trend in the housing and mortgage markets had not changed materially in recent weeks.
"The immediate direction of house purchase activity is a little unclear, although the story for remortgages, with strong year-on-year increases in activity this year, is for the time being more straightforward," Mr Pannell said.
He called on the Chancellor to introduce measures to stimulate the housing market in his Autumn Statement at the end of this month. "The housing market ... offers a tried and tested means of providing a timely stimulus to the wider economy."