Sept. 29 (Bloomberg) -- The pound tumbled against the dollar by the most in 16 years after the U.K. government seized Bradford & Bingley Plc, Britain's biggest lender to landlords, as the credit crisis deepened in Europe.

The pound also dropped versus the euro as a report showed U.K. mortgage approvals fell in August to the lowest level since at least 1999 as the global credit squeeze caused banks to curb lending. The British currency was today's worst performer among its 16 major counterparts after the Belgian and German governments stepped in to rescue Fortis and Hypo Real Estate Holding AG, respectively.

``Sterling always tumbles when we have bad news on banks,'' said Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas SA, France's biggest lender. ``Banks are de-leveraging and the U.K. economic numbers are coming in very badly. The pound isn't going to perform in this environment.''

The British currency fell as much as 2.6 percent to $1.7959, the biggest intraday drop since September 1992, from $1.8445 at the end of last week, and slipped to 79.73 pence, from 79.23 pence by 5:14 p.m. in London.

The pound will decline to $1.74 in coming months and to $1.65 in a year, Redeker predicted.

Banco Santander SA, Spain's biggest lender, will pay 612 million pounds ($1.1 billion) for Bradford & Bingley's 197 branches and 20 billion pounds of deposits, the bank said today. Bradford & Bingley became the second U.K. bank, after Northern Rock Plc, to be nationalized this year as survivors of the global credit crunch balk at swallowing all the risks facing weaker competitors.

`Very Risky'

``You've got Bradford & Bingley in the U.K., so the problems are not limited to the U.S., and that's weighing on sterling '' said Paul Robinson, a currency strategist in London at Barclays Capital and a former Bank of England economist. ``The world seems very risky.''

The U.K. currency may fall to $1.80 in coming weeks, before rallying in three months to $1.88, Robinson said. Against the euro, it will hold near 80 pence in the next three months, he predicted.

Lenders approved 32,000 loans for house purchase, down from 33,000 in July, the lowest since comparable data began nine years ago, the Bank of England said today. The value of those loans fell to 143 million pounds, the lowest since April 1993.

Property Values

A separate report from Hometrack Ltd. showed U.K. house prices fell by the most in at least seven years in September. The average cost of a residential property in England and Wales slipped 6.2 percent in the year, the London-based research company said today. That's the biggest annual drop since the index started in 2001.

The credit crunch has starved the housing market of loans and threatened to push the U.K. economy into a recession. In an attempt to stimulate growth, the Bank of England will lower its benchmark interest rate as soon as next month, Citigroup Inc. said on Sept. 26, revising an earlier prediction for no reduction until next year. Policy makers next meet to review rates Oct. 9.

U.K. government bonds gained as investors sought the safest securities. The yield on the 10-year gilt dropped 16 basis points to 4.38 percent, the lowest level since Sept. 18. The 5 percent security due March 2018 rose 1.28, or 12.8 pounds per 1,000-pound face amount, to 104.76.

The yield on the two-year note slipped 25 basis points to 4 percent, the lowest level since April 16. Bond yields move inversely to prices.

President George W. Bush and Congressional leaders agreed on a $700 billion plan to revive credit markets by purchasing tainted assets from banks.

U.S. lawmakers reached agreement yesterday as House Republican leaders backed away from opposition to the proposal after it included plans to create insurance for mortgage-backed securities. The House and Senate are scheduled to vote on the bill early this week.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

Last Updated: September 29, 2008 12:25 EDT