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Despite the drop, house prices in March were still 1.1 per cent higher than a year earlier, but overall house prices in the first quarter were 1 per cent lower than in the fourth quarter of 2007.

Regionally, there was a mixed picture, with the biggest house price rises in Greater London at 1.6 per cent, followed by East Anglia at 1.4 per cent and the East Midlands at 2.2 per cent.

However, prices also fell in a number of regions, with the biggest fall of 5 per cent hitting the West Midlands, followed by a drop of 4.7 per cent in Wales.

Looking at the year ahead, the Halifax predicts only a low single digit decline in UK house prices because of the shortage of new houses, a strong labour market and low interest rates.

It also stressed that any modest falls should be viewed in the context of past significant house price rises which in the last 10 years have increased by 171 per cent or around £120,860.

Commenting on the index, Capital Economics property economist, Seema Shah said the drop in house prices is the second largest in the history of the index, beaten only by the fall recorded in 1992 when the housing market was in the grips of a full-blown crash.

"It is fair to say that this is not a hiccup, but the start of a correction which is likely to run through the rest of this year and next."

Capital Economics predicts house price falls of 5 per cent in 2008 and 8 per cent in 2009.