By Sinead Cruise

LONDON (Reuters) - European housing markets need to see more repossessions in 2010 to bring limp credit markets back to life, or months of mortgage scarcity could morph into years of stunted house prices, fewer sales and more costly home loans.

Europe has largely escaped the wave of foreclosures that has dogged the United States, but experts say lenders could hasten an end to Europe's housing hangover if they called time on their most troubled mortgages to free up funds for stronger borrowers.

"Many banks have already posted losses on their books well below the prices they could sell assets for today," said Stuart Law, chief executive of property investment boutique Assetz.

"They should be able to turn a good profit when they do decide to start churning their portfolios," he said.

The U.S. housing market is taking baby steps towards a recovery after years of plunging prices but only after lenders ordered millions of foreclosure filings against indebted homeowners.

A similarly vast wave of foreclosures would hurt Europe's recovery, experts say, but a smaller burst of sales may aid price discovery and lift credit flows between borrower and bank.

"We share the opinion that average house prices have not moved sufficiently to remove the froth from the market but that doesn't mean another bubble is in the making, it just means prices could move downwards for a very long period of time," said Moody's Investor Service economist Nitesh Shah.

"This kind of gentle correction could be aided by a slow trickle of repossessions which could promote transactions without destabilising the system -- subject to sufficient buyer demand to purchase these assets from the banks," Shah added.