Irish Life & Permanent (IL&P) has forecast a drop of €800 million in new mortgage lending as the property market cools. The news, combined with general weakness in banking stocks, sent the group's shares down down 46 cent, or 2.4 per cent, to €18.82.

AIB was the worst hit yesterday, falling 2.9 per cent to €21.15, as markets reacted to higher bond yields and oil prices, with one dealer describing the share price falls as "complete carnage".

In its pre-close trading statement, IL&P said that new residential lending was expected to drop to €3.4 billion, down from €4.2 billion in 2006. The lower levels of activity were seen as further evidence of a slowdown in the property market, although the bank's residential loan book is still expected to see growth of around 20 per cent this year.

Chief executive Denis Casey said he agreed with the Central Bank that the property market had entered a soft-landing phase.Group finance director Peter Fitzpatrick said lending margins had been reduced by rising competition and the higher cost of funds.

On a positive note, the group said it anticipated that pre-tax operating profit from its core life assurance and banking business would show growth in the high teens. Its previous guidance was that it would enjoy low to mid-teen growth in profits. The subdued mortgage market meant that sales of mortgage protection policies, its highest-margin life product, did not keep pace with growth in other product lines.

But the maturing of Special Savings Incentive Accounts (SSIAs) boosted the life side of the business. Pre-tax operating profit in the life business for the first six months is expected to be around 35 per cent, although this growth rate is unlikely to be sustained.

At Irish Life Investment Managers a number of big-ticket mandates, including a contract to manage EBS's €600 million retail investment funds, meant inflows into the business more than doubled in the first half of the year.