American states such as New York, Massachusetts and Ohio collectively will extend more than $500 million (£245 million) in bailouts to homeowners struggling to meet loan repayments in an attempt by officials to prevent worst-hit neighbourhoods from declining amid repossessions.

With more than 700,000 American households set to lose their home this year and growing impatience with the federal Government’s response to the mortgage meltdown, individual states are moving to reduce the problem. Massachusetts has made the biggest commitment so far, setting up a $250 million fund to prevent about 1,000 “delinquent” borrowers from losing their homes. New York is expected to announce a $100 million bailout in the next few weeks, which would help about 500 homeowners in the state.

Maryland, New Jersey, Ohio and Pennsylvania are also working on bailouts as they strive to prevent pockets of housing from being dragged too far down by a surge in repossessions, which can prompt a downward spiral as neighbours sell up and house prices plunge. Each state is structuring its bailout slightly differently, although none is thought to be funded directly from the taxpayer’s pocket. In the Massachusetts bailout, the state will raise a fund by selling, to private investors, bonds that will be used to refinance high-risk sub-prime mortgages into home loans that can be paid off over 40 years.

The bottom has fallen out of America’s housing market in recent months as increasingly lax lending practices have led to a surge in defaults on sub-prime mortgages, which has contaminated the entire housing market.

The average US house price is predicted to fall by a record 8 per cent this year in a slump that will lead mortgage banks to foreclose on an estimated 1.8 million home loans. About 40 per cent of these foreclosures are likely to end in a forced sale or repossession. In the remaining cases, the bank and the borrower will reach an alternative repayment schedule.

The US dollar has slumped recently, largely over fears of widespread fallout from the sub-prime mortgage situation. Stephen Jen, the global head of currency research with Morgan Stanley in London, said: “Reflecting the growth and interest rate divergence between the US and the rest of the world, the dollar will likely continue to be treated as ‘the sub-prime currency’.”

Figures on the sales of existing homes are scheduled to be announced tomorrow; new-home sales will be reported on Thursday.