UK house prices fell by 0.4% in October - the biggest decline since February 2001 - according to the Nationwide.
As a result, the building society said annual house price inflation had "slowed sharply" to 15.3% from 17.8% last month.
The average price of a house in the UK now stands at £152,159 down from July's peak of £154,299, Nationwide said.
The group blamed weak wage growth, stretched affordability and interest rate rises for the slowdown in prices.
But, Nationwide added, the market is usually weak in the late summer/early autumn period - a factor that contributed to the fall.
The group said that of the £2,140 fall in prices, £1,970 was down to seasonal weakness in the market - with just £170 of the drop attributable to underlying price falls.
Further factors contributing to the drop were a deterioration in affordability - for first-time buyers and homeowners, who are now facing a tough time trading up - and a drop in demand from buy-to-let investors.
The survey appears to back up recent evidence of a cooling house market.
On Wednesday, the British Bankers Association (BBA) said just 59,905 mortgages were approved in September - a 29% fall from the 81,635 new loans approved in the same period last year.
But the fall was not the first recorded by a lender this year.
Figures from the Halifax, UK's biggest mortgage lender, showed prices fell 0.6% in August, the first time the bank's index had dropped since August 2002.
Crash ruled out
However, despite growing evidence of a slowdown in the market, the Nationwide ruled out any possibility of a market crash.
While the group did not rule out falls in "isolated months", it did not expect a sustained period of declines as the economy is growing quickly and the jobs market remains strong.
"Developments remain consistent with our view that over the coming years, house prices are more likely to grow at a very subdued rate rather than fall sharply," said Nationwide group economist Alex Bannister.
"Our view is the current moderation in price growth expectations will not translate into widespread panic and that instead the market will experience subdued levels of turnover and price growth."
The building society found that consumer expectations of a rise in property prices have also fallen, with just 40% of people believing prices will increase over the next six months, compared with 64% in June.
The number of people who believe prices are set to decline has doubled, from 7% in June to just over 15% in October.
Price drop 'expected'
Some analysts said the Nationwide could be mistaken in asserting that the market is in for a soft landing rather than a crash.
Given Wednesday's government figures showing an increase in house repossessions, the signs suggest that current price levels are unsustainable, experts warned.
"We believe that prices need to fall by around 20% to put the market back on a more sustainable footing," said Ed Stansfield, a property specialist at Capital Economics.
"Thus we expect price falls, such as that reported by the Nationwide today, will be the dominant trend of the next two to three years."
However, others noted that fears of a housing crash made further rises in interest rates less likely.
"Given the Bank of England's concern that the housing market slowdown could turn into an 'abrupt' correction, it seems ever more likely that the Bank will leave interest rates unchanged for an extended period," said Global Insight economist Howard Archer.