LONDON (Reuters) - The government will appoint former HBOS chief executive Sir James Crosby on Wednesday to head a working group on ways to improve the functioning of the country's mortgage markets.

Crosby will put together a team of mortgage industry experts and aim to produce an interim report by the summer, a Treasury spokesman told Reuters.

The announcement is timely. Strains in the mortgage markets are becoming more apparent by the day as lenders struggle to raise funds.

Many banks have been forced to put up mortgage rates even as official interest rates have fallen, adding to downward pressure on house prices.

Britain's biggest mortgage lender, the Halifax, reported the biggest monthly fall in house prices on Tuesday since the recession of the early 1990s.

The Treasury spokesman said the working group will look at a range of options -- including broadening the investor base for mortgage products and boosting issuance of covered bonds -- and collaborate closely with the Bank of England, the Financial Services Authority and the Treasury.

It will produce a final report in time for the government's pre-budget report this autumn.

Industry groups, however, have called for immediate action to ease the credit squeeze and may be hoping a meeting of the Group of Seven leading industrialised nations this weekend yields more tangible results.