By Clara Ferreira-Marques

LONDON (Reuters) - Britain's biggest mortgage lender HBOS warned of a sharper fall in house prices and said more of its customers were falling behind on their repayments, sending its shares sharply lower.

HBOS HBOS.L, set to raise 4 billion pounds in a rights issue starting later this month, said on Thursday it expects house prices to fall 9 percent in 2008, having in April forecast a "mid-single digit" drop.

As recently as February HBOS -- parent of Halifax and Bank of Scotland -- was forecasting prices to be flat this year.

The bank also said an increased 1 billion pound asset writedown would hit its first-half results, but said it was passing on more of its higher costs through better pricing on new lending as a third of its mortgage book moves off fixed-rate or discounted deals.

It forecast a slower decline in margins in 2008 than in 2007, before margins stabilise or improve next year.

Its shares were down 4.2 percent at 305-1/2 pence by 10:53 a.m., underperforming a 0.4 percent rise in the FTSE 100 .FTSE index, as the worsening economic outlook and rising arrears overshadowed reassurance that trading continued in line with expectations.

"The statement demonstrates they are managing the business defensively. It shouldn't be a surprise to anyone -- arrears, house price deflation, margins," analyst Mike Trippitt at Oriel Securities said.

"It's difficult to be positive about it, but you have to ask yourself, how much is already in the price?"