* July home prices ease from June, third straight monthly fall
* Declines seen continuing in further drag on economy
* Prices still up 2.5 pct on year but slowest gain in 17 months
* New home prices fell in record 64 cities m/m in July
* Developer Vanke says can't be too optimistic on policy easing (Adds comments from China Vanke)
By xiaoyi shao By Xiaoyi Shao and Koh Gui Qing BEIJING, Aug 18 China's new home prices fell in July for a third straight month with price declines spreading to a record number of cities including Beijing, underlining a worsening property downturn that is increasingly dragging on the broader economy.
Average home prices slipped 0.9 percent in July on a monthly basis, data on Monday showed, as declines spread to the largest number of cities since January 2011, when authorities started releasing the property price data.
"We expect home prices to continue to drop in coming months due to increasingly pessimistic market sentiment," said Yan Yuejin, a property analyst at real estate services firm E-House China in Shanghai.
"The possibility of further moves by the central bank to loosen monetary policy cannot be ruled out. That would put a floor beneath prices," Yan said.
China's once-heated housing market has slowed this year as sales and prices turned south in their biggest pull-back in two years, driven by the cooling economy and the government's five-year-long campaign to keep price rises in check.
The fall in prices adds to concerns about the health of the economy and followed news last week that property investment and property sales cooled in July, while banks appeared more cautious and less eager to lend.
China Vanke , the country's largest residential developer, saw its first-half net profit rise 5.6 percent from a year ago, down sharply from a 22.3 percent annual increase in first half of 2013.
The company told a news conference in Hong Kong on Monday that home prices and sales volume would not rebound quickly even though many cities had eased restrictions on home purchases.
"It took a long while for the government to suppress housing prices in the past. We can't expect transactions to climb once market easing takes effect," said Vanke President Yu Liang. "The market cannot be too optimistic."
Vanke said recently that the "golden era" for China's real estate sector is over and it may take two to four years for the industry to correct.
Most of Vanke's properties are in the biggest cities, which are now starting to show signs of succumbing to the national downturn, though its emphasis on smaller, less expensive homes may offset some of the impact.
Many would-be buyers, meanwhile, appear to be content to sit and wait, anticipating further price declines.
"Uncertainties over the outlook of the property market have kept potential home buyers standing on the sidelines," Liu Jianwei, a senior statistician at the National Bureau of Statistics (NBS), said in a statement accompanying the data.
Average new home prices in 70 major cities fell 0.9 percent in July from the previous month, accelerating from June's 0.5 percent monthly drop, according to Reuters calculations based on data issued by the National Bureau of Statistics on Monday.
The softness in the housing market, which accounts for more than 15 percent of China's annual economic output and directly impacts around 40 other business sectors, has become an increasing drag on the broader economy.
BIGGER PRICE FALLS
The NBS data showed new home prices in July fell in 64 of the 70 cities that were surveyed, up from 55 cities in June.
The worst month-on-month performance was in the eastern city of Hangzhou and the southern city of Sanya, where prices sagged 2.4 percent in July.
Price declines on a monthly basis were also seen in smaller cities, including the northern city of Shenyang, the central city of Wuhan and the eastern city of Yangzhou, where home prices all fell 1.7 percent.
The downward trend also spread to the country's wealthiest cities. In Beijing, prices slipped 1 percent from June in their first decrease in over two years, while those in Shanghai eased for the third consecutive month but at a somewhat faster pace.
Compared to a year ago, new home prices were up 2.5 percent in July, slipping from the previous month's 4.2 percent gain and marking the slowest annual growth in 17 months.
Analysts believed the downturn could persist in coming months due to high inventories and sluggish sales.
"Reports of a rising number of cities relaxing home purchase restrictions are encouraging, though with a large inventory overhang, they provide no hope of a quick rebound in prices," Prakash Sakpal, an economist at ING said in note to clients.
A growing number of local governments have eased restrictions on property purchases in recent weeks, while state-controlled banks have also revved up lending to the sector, though some analysts believe banks are increasingly reluctant to lend to some developers as the downturn persists.
At least 30 regional governments, which earn a large part of their revenues from selling state land, have openly or quietly relaxed home purchase restrictions this year, according to data from private consultancies.
Even if the slowdown lasts for more than a year a market collapse is seen as unlikely if local governments continue to relax controls and banks keep credit ample, according to a Reuters analysts poll last month.
While easier access to loans is seen as key to preventing a sharp correction in the property market, a survey by Standard Chartered indicated many developers were finding it tougher to access funding through banks or trust loans.
Respondents said borrowing costs were rising, and most believed banks did not appear more willing to extend loans to first-time home buyers, despite encouragement from the central bank.
Several domestic banks in Shanghai, including Bank of China Ltd, China Construction Bank Corp, Industrial and Commercial Bank of China Ltd and Agricultural Bank of China Ltd, denied that they had lowered interest rates on property loans, the China Securities Journal said on Monday. (Additional reporting by Hou Xiangming and Pete Sweeney, and Clare Jim in HONG KONG,; Editing by Eric Meijer)