LONDON: Retail prices in March posted their first annual drop in nearly in nearly 50 years, official data showed Tuesday, stoking fears the recession-hit country now faces an additional threat from deflation.

The Office for National Statistics said the Retail Prices Index (RPI) annual inflation rate, which includes the cost of home loans, was a negative 0.4 percent in March after a flat reading in February.

"For the first time since March 1960, annual inflation measured by the RPI, which includes housing costs such as mortgage interest payments and council tax, fell below zero," the ONS said.

Home-loan repayments have fallen dramatically for many property owners in recent months as banks have slashed interest rates in response to similar sharp cuts in borrowing costs by the Bank of England.

The ONS added Tuesday that 12-month consumer price inflation (CPI) slowed to 2.9 percent in March owing to sliding gas, housing and transport costs.

That was the lowest CPI level since March 2008 and compared with a reading of 3.2 percent in February. The CPI rate, however, still remains far above the Bank of England's government-set target of 2.0 percent.

"The most eye catching data saw headline retail prices fall 0.4 percent year-on-year in March, thereby moving into negative territory for the first time in 49 years as (they were) dragged down by sharply reduced mortgage interest rates," IHS Global Insight economist Howard Archer said.

Tuesday's news sparked fears of deflation -- or a prolonged period of falling prices -- could be adding to the problems of the recession-hit economy.

"The ongoing relative stickiness of consumer price inflation suggests that it is unlikely to turn sharply negative later this year although a brief period of mild deflation is still possible," Archer said.

But Credit Suisse economist Neville Hill cautioned that the economy was not yet experiencing deflation.

"Although RPI inflation is now negative this does not mean that the UK economy is in deflation," Hill said.

"The negative RPI rate is almost entirely due to falls in mortgage interest payments as interest rates have fallen."

The Bank of England has slashed interest rates six times since October, to a current record-low level of 0.5 percent, as it seeks to lift the country out of its first recession since 1991.

Tuesday's inflation data was published one day before the government's keenly-awaited annual budget outlining taxation and spending plans for the 2009/2010 financial year.