As a panel of experts warns the economy is already in recession, new figures reveal mortgage lending has slumped to its lowest level for more than three and a half years.

The Ernst & Young ITEM club, which uses the Treasury's own model for its prediction, says the credit crunch will hit the UK "very hard".

House prices will be 14% below their 2007 peak by the end of the year and tumble a further 10% in 2009 before stabilising in 2010, it added.

The gloomy forecast comes as official figures, out on Friday, are expected to show the first quarter of economic contraction since 1992 between June and September.

The ITEM club says the economy will shrink for three further quarters before hitting rock bottom in the second half of next year.

It says there could be a weak recovery in 2010.

Its chief economist, Peter Spencer, said: "We now have to face up to the reality of an economy that has been seriously weakened by recent dramatic events.

"The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy."

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