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* Starkest warning yet from Bank of England
* Cunliffe says Bank vigilant, ready to act
* Bank's Financial Policy Committee meets next month (Adds detail, background)
By Huw Jones
LONDON, May 1 (Reuters) - A top Bank of England officialdelivered the sternest warning to date about surging Britishhouse prices on Thursday, saying it would be "dangerous" toignore the momentum that is building up in the market.
The BoE would have to decide in coming months whether tocool the recovery, Deputy Governor Jon Cunliffe said onThursday.
It was unclear if the market was heading for a soft landingor a major overshoot in prices that ends with a crash, he added.
"It would be dangerous to ignore the momentum that has builtup in the UK housing market since the spring of last year,"Cunliffe told a banking industry dinner. "This is a movie thathas been seen more than once in the UK."
Mortgage lender Nationwide said on Thursday that Britishhouse prices last month recorded their biggest annual rise sincethe start of the financial crisis in 2007.
BoE Governor Mark Carney and other top officials havepreviously played down talk of a property bubble, sayingtransactions remain below the level before the crisis.
However, Carney warned late last year that Britain's housingmarket could heat up with "warp speed."
The BoE is hoping to avoid having to raise interest ratesfrom their record low of 0.5 percent as the British economycontinues to recover from the financial crisis. Instead, theBank has pointed to measures it could use to restrain credit.
Two senior BoE officials faced repeated questioning thisweek from lawmakers on whether a property bubble was emerging inBritain to undermine financial stability.
Cunliffe sits on the Bank's Financial Policy Committee(FPC), which can force banks to hold more capital or askregulators to take other types of action. It is due hold itsnext meeting in June.
"Whether and how to act further if, following the pause ofthe last couple of months, momentum continues to build, will bethe most challenging judgement the FPC will have to take in thecoming months," Cunliffe said.
The FPC was formally launched last year to plug asupervisory gap highlighted by the 2007-09 financial crisis.
Cunliffe said the momentum in the housing market is now the"brightest light" on the committee's dashboard.
He also said Britain's banks, most of whose lending is inthe form of mortgages, are now better placed to handle a majorhousing shock, while home loan underwriting standards have beentoughened up but it was too early to say if this was working.
Cunliffe said FPC was looking at whether higher propertyprices actually result in more transactions at higher prices,and whether that in turn leads to higher household debt.
"The FPC's response will depend on the nature of the risksto stability identified," he said. (Editing by William Schomberg and Mark Heinrich)
