Tens of thousands of current borrowers and new buyers will be refused mortgages this year unless the Bank of England provides greater financial help to banks and building societies, the Council of Mortgage Lenders (CML) cautioned yesterday.

Steven Crawshaw, chairman of the CML and chief executive of Bradford & Bingley, the biggest buy-to-let lender, said that banks could be forced to halve mortgage lendingthis year unless the Bank took more action to help them. This could leave many borrowers out in the cold when they come to apply for a mortgage.

A spokeswoman for the CML said: “If we get to a draconian point of a much smaller market then it will be a mixture of first-time buyers and remortgagers who are affected.”

Banks have become wary of lending to each other after the sub-prime crisis in the US, and this has increased the cost of loans between banks. Many lenders have been passing on this rocketing cost to their customers by raising interest rates. In addition, they have been refusing to lend to those who do not have large deposits.

The CML said that this situation would get worse if the Bank of England did not extend more credit to mortgage lenders. Mr Crawshaw said: “We will see an ongoing process of attrition in mortgage choice, with lenders managing down demand by tightening lending criteria, increasing price or withdrawing more products from the market altogether.”

The Bank has been lending tens of billions of pounds each month, but mortgage providers want more longer-term loans of up to two years. If it does not provide these, the CML said, the £108 billion mortgage market could shrink to less than £60 billion.

Mr Crawshaw urged Mervyn King, the Governor of the Bank of England, to “show leadership”, saying that there was a “real and immediate need for broader action than we have seen”.

“Compared to the actions of the Federal Reserve in the US, our central bank stands accused of having been cautious and slow,” he said. “The main short-term palliative is in the hands of the Bank of England.”

The Bank said that it was in discussions with lenders about sorting out the problems but indicated that it was too soon to tell where those discussions would lead.

Mr Crawshaw also said that there was inadequate state support for mortgage borrowers who fell into difficulties. He said that the Government should bear the short-term cost of schemes to help homeowners under threat of repossession in order to get “tangible longer-term returns”.

He also issued a plea to the City watchdog to “regulate us in a proportionate and focused way”, highlighting lenders’ frustrations that communications from the Financial Services Authority were “more alarming than reassuring in tone”.

Four major banks increased the cost of their new mortgage deals on Thursday despite a quarter-point cut in the base rate, indicating that the Bank is losing its grip on controlling mortgage rates via the base rate. The interbank lending rate actually increased yesterday, despite the rate cut.

A shortage of mortgages is likely to depress the housing market further. Mel Bien, of the mortgage broker Savills Private Finance, a mortgage broker, said: “If people can’t get a loan, they won’t be able to buy a property, so that will depress prices.”

Alistair Darling appointed Sir James Crosby, the former chief executive of HBOS, to head a working group on solving the funding issues. This is due to draw up recommendations for the autumn’s Pre-Budget Report.

However, Mr Crawshaw said that this was unlikely to be fast enough to stop the current funding difficulties plaguing lenders. The timescale “would simply not address the urgency of market difficulties now”. But he said he hoped that the interim report, due to be released in the summer, would “point us in the right direction”.