LONDON (Guardian) -- UK economic growth could be hit sharply if a global credit crunch materializes as feared, a leading think tank has warned.

The study, published today by Oxford Economics, is the latest to add to mounting fears that an era of cheap funding for corporate takeovers may be coming to an end as turmoil in the U.S. sub-prime mortgage market threatens to spread to the wider economy and beyond.
Following a long period of world economic health, the report said there had been rapid growth in the market for risky assets at prices which offer little insurance against even a moderate worsening in financial market conditions - something the Bank of England has long been warning about.
With large sums knocked off the value of many companies in stock markets around the world last week, Oxford Economics cautions there is a risk of the downturn deepening and cutting into the growth of countries including Britain and the U.S.
It predicts a halving of growth in the City, which accounts for 8% of the British economy and has surged by about 10% in the last two quarters. It says 0.4 percentage points would be shaved off national economic growth.
In the U.S., where finance and insurance also account for 8% of GDP, but where the sector has grown much more slowly, GDP growth would be cut by 0.2%.
""What we have seen is a large correction similar to what we have had in the past,"" said Adam Slater, the report's author. ""We have to see something deeper.
This could be the synchronization
[in downturns] of several credit markets. ""We identify a number of markets that look to be at risk of a downturn. We believe the risk is particularly high for the UK where financial growth has been running in double digits.""
The report highlights the leveraged buyout market where activity has exceeded its previous peak in the 1980s and deals are becoming increasingly leveraged - built on debt.
As lenders tighten borrowing and the higher interest rates in the U.S., Europe and the UK choke off new credit, many of these deals could collapse.
There has also been a surge in low-grade corporate debt, but the current extremely low default rates were not sustainable, Slater said.
He added that given the importance of the financial sector in the U.S. and UK, the impact of these problems in debt markets could be significant, not only slowing growth to below its average but also affecting financial sector jobs and slowing the housing market.
The report also stressed the concern about the meltdown in the U.S. property market, sparked by problems in the sub-prime mortgage market for loans to buyers with poor credit records. Lenders have already suffered significant losses and Slater said there was a risk these troubles might prompt widespread weakness in the economy. There could be a knock-on effect on consumer spending in what is the world's largest consumer, he said.
Meanwhile, figures from the Bank of England yesterday showed the UK housing market remained resilient despite five interest rate rises in less than a year. Mortgage lending in June grew at its fastest pace in three months, rising by £9.55bn, well above City forecasts.
Approvals for new home loans, a measure of the future health of the housing market, held steady at 114,000 in June against predictions they would ease off.
The data contrasted with a string of reports that have suggested the housing market may be running out of steam. A survey by property consultants Hometrack yesterday showed that house price inflation in England and Wales cooled in July to an annual rate of 5.9%, down from 6.4%.