LONDON (Reuters (LSE: TRIL.L - news) ) - The credit squeeze for households and businesses looks set to intensify as lenders brace for rising defaults and the economy slows, a survey by the Bank of England showed on Thursday.

The findings are bound to heighten concern over the state of the economy following a raft of data showing a sharp housing market correction is already damaging consumer and corporate confidence.

"Lenders reported that their expectations for the housing market, the changing economic outlook and changes in their appetite for risk had contributed to the decline in credit availability," the bank's quarterly credit survey noted.

"Lenders expected these factors to contribute to the tightening in credit availability over the next three months."

The survey, conducted between May 27 and June 18, showed default rates on secured lending to households rose by more than anticipated in the second quarter and lenders expect a further increase in the coming months.

Lenders also expected corporate defaults to pick up and were ready to tighten loan terms further.

"An end to the credit crunch does not seem to be in sight if the Bank's second quarter credit conditions survey is anything to go by," said Vicky Redwood at Capital Economics.

"Overall, further evidence that the economy is heading for a nasty downturn."

Figures this week show the services and manufacturing sectors are already contracting at their sharpest pace since 2001 while construction is in virtual free-fall.

Lenders reported unexpectedly large falls in demand for credit for mergers and acquisitions activity and capital investment, and from the commercial real estate sector.

(Editing by Mike Peacock)