Nationwide Building Society said the annual drop was the biggest it has recorded since its index began back in 1881.

Prices dropped by a further 1.7%  in September, to leave the average UK property costing £161,797.

The 11th consecutive monthly decline highlights the sharp reversal of fortune for the property market since the credit crunch took hold last summer, bringing an end to a decade in which property values almost trebled.

Mortgages have also become increasingly difficult to obtain as banks tighten their lending criteria.

In September 2007,  before the full force of the credit crunch struck, annual house price growth was running at 9%, mortgage approvals for house purchase were in line with their long-term average and 40% of first-time buyers were borrowing more than 90% of their home's value.

Despite the figures, Nationwide said there was evidence that the rate of decline was stabilising.

Fionnuala Earley, Nationwide's chief economist, said:
"House prices have now fallen for eleven consecutive months, but the monthly rate of fall has been almost unchanged in the last three months.

"The less volatile three-month-on-three month series has also barely changed for the last three months, after accelerating in the first half of the year. This may suggest the beginning of some stabilisation in the pace of house price falls."