Chief executive Brian Davis said: "With the UK economy in general and the housing market in particular slowing, the second half of the year will prove to be a challenge for all in financial services."

The warning came as Nationwide reported a 20% increase in profits for the six months to October.

The building society reported pretax profits for the six months to 4 October of £212.7m compared with £176.6m for the same time period last year.

Asset growth was 6.2%, to £50bn compared with £47.1bn as at 4 April, and 11% in the past year compared with £45.1bn as at 4 October 1997.

Market share stable

Mr Davis said the society, which rejected converting to a bank in July, had held on to its increased market share despite intense competition.

"Strong growth on both sides of the book shows that we have retained the increased share of both the mortgage and savings markets that we have built up over the past couple of years," he said.

The building society said it estimated its net mortgage share to be 11.6%.

Savings balances were up 8.6% in the six months to £35.9bn against £33bn as at 4 April and up 11.5% in the past year against £32.2bn as at 4 October 1997.

Mr Davis said Nationwide had already returned around £150m of benefits to members this year through lower mortgage rates, higher savings rates and service improvements.

He said the society was on target to return £300m over the course of the whole year.