UK mortgage approvals plunged 13% between May and June, dropping to the lowest level since December 2010.
According to data released by the Bank of England (BoE), 44,192 new mortgages were approved in June compared to 50,544 in May.
The official forecast for June was also some 10% out, at 49,000 mortgages.
The BoE said it was also the sharpest annual fall in M4 money supply, which is one of the widest indicators of the economy, since records began in 1983.
The negative economic news comes as a study revealed that house prices have fallen for the first time in seven months, as fewer people look to buy while more people look to sell.
The gap between supply and demand is expected to widen after the surprisingly early and quick summer slowdown, meaning prices are likely to fall further in the coming months into autumn, property analyst Hometrack said.
Prices fell by 0.1% in July after being flat in June, with activity slowing down notably in London and the South East, which have been supporting the market and keeping average prices up.
Meanwhile, price falls in the northern regions, which have been bigger than those in the South, could be "bottoming out", the study suggested.
"Weaker demand is to be expected over the summer months, but compared to previous years, the seasonal slowdown has started earlier and developed more rapidly than in previous years," said Richard Donnell, director of research at Hometrack.
"This reflects growing concern over the UK's economy and the deepening eurozone crisis."
London was the only region to see a price increase in July - with a rise of 0.1% - but the rate of growth has slowed, according to the findings. The North East saw the biggest price fall, with a 0.5% drop.
Mr Donnell said: "Price falls in the capital are primarily being seen in outer London, where domestic demand is slowing as sentiment weakens and affordability pressures bite.
"A similar pattern is being seen in the south east, where prices were down across 35% of the region in July - above the national average."
Mr Donnell said that, away from London and the South East, there is evidence that price falls may start to slow.
"The proportion of the asking price being achieved in northern regions has improved over recent months, albeit off a low base," he said.
"Above-average falls have resulted in prices slowing to a level where sales can take place without the need for large discounts. This suggests some bottoming out of prices in these regions which have seen larger price falls than southern England."
Borrowers with smaller deposits are expected to have a particularly tough time finding a mortgage in the coming months as lenders continue to tighten their criteria in the uncertain economy.
The study is based on research from 1,500 estate agents and surveyors across England and Wales.