By Clara Ferreira-Marques

LONDON (Reuters) - House prices could retreat in 2010 if unemployment rises sharply, Britain's third-largest mortgage lender Nationwide warned on Friday.

A lack of supply and low interest rates have boosted the housing market this year, but Nationwide said prices could go into reverse with unemployment set to rise further and a stock shortage showing signs of easing.

"That phenomenon (tight supply) has now almost played out and we are back to more normal levels of demand for property," Chief Executive Graham Beale said.

"We are cautious about where unemployment is going. If it does rise significantly, that will have a downward pressure on house prices in the new year."

Having fallen sharply last year, house prices have gradually risen in recent months and Halifax, the UK's largest mortgage provider, said earlier this month prices had risen 1.2 percent in October, squeezing the annual decline to its smallest in 1-1/2 years.

But rising unemployment remains a threat to the recovery. Latest monthly UK jobless figures showed the number of Britons claiming unemployment benefit rising by the smallest amount in 18 months, but some economists expect the rate to rise further next year.

Falling house prices would have a knock-on effect on arrears across the residential lending sector, Beale added as Nationwide, Britain's largest customer-owned lender, said its earnings more than halved in the first half.

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