By Huw Jones

PARIS (Reuters) - The financial market ignored warnings that house prices were likely to fall, a top banker said on Thursday, adding the U.S. subprime crisis and ensuing credit squeeze were due to inadequate risk management.

Malcolm Knight, general manager of the Bank of International Settlements (BIS) -- the central banks' bank -- said sectors like securitization and credit rating agencies could not have been unaware of what was happening in the U.S. housing market.

"Participants ignored the possibility of a general decline in housing prices," Knight told a meeting of the International Organisation of Securities Commissions (IOSCO).

"The crisis was not solely the result of bad luck but inadequate risk practices and inadequate due diligence of market practitioners," he said.

IOSCO, other regulatory bodies and governments are in the middle of applying lessons learned from the subprime crisis as fallout from it has begun to damage economic growth.

Knight also said investors should place less reliance on the ratings that credit rating agencies put on structured products.

"Complex engineering led to fundamental illusions among investors," Knight said.

"It was a fallacy that complex instruments could be created tailored to the needs of the investor and at the same time be continuously tradable in the market," he said.