Surging house prices are putting the British banking system under strain, according to credit rating agency Standard & Poor's.

S&P has added the UK to a list of countries where banks face the prospect of lower revenues or rising bad debt.

And it has identified a possible property market crash as the biggest single threat.

The move marks the first time that the British banking system has been included on S&P's 'at risk' list.

The rating agency said housing loans on British banks' books are reaching "uncomfortably high levels, particularly with respect to those in the Greater London area."

Debt pile

British house buyers have borrowed heavily to keep pace with soaring property prices, helped by high levels of employment and low interest rates.

But a sudden rise in unemployment or borrowing costs could leave many overstretched homeowners unable to repay their debts, exposing lenders to a sharp increase in bad loans.

The S&P report follows gloomy trading statements from High Street banks Barclays and Lloyds TSB last week, with both warning that bad loans were on the rise.

S&P's warning on house prices echoes similar comments from the Bank of England, which last month said the longer the current boom continued, the greater the risk of an "abrupt slowdown".

Reassurance

The housing market is a key determinant of economic growth in Britain, where home ownership is the norm, and consumers tend to finance current spending by borrowing against the rising value of their properties.

The last UK property market crash, in the early 1990s, ushered in a prolonged period of slow growth.

British financial institutions downplayed the S&P report, insisting that the banking sector would be well able to cope with a property market slump.

The Financial Services Authority, the UK's main financial regulator, said banks remained "well capitalised and profitable," while the British Bankers' Association said there was so far no evidence of debt problems.

Some economists have said that since neither interest rates nor unemployment are likely to rise significantly, the risk of a house price crash is low.