Central bankers are loath to admit the role asset prices play in monetary policy. Nevertheless, the housing markets of America, euro region, and Britain present three distinct challenges to the guardians of financial stability.

The U.S. housing market is in a funk that can only get worse as borrowing costs rise. American home prices dropped in the three months through March, the first quarterly decline in almost 16 years, according to figures compiled by S&P/Case-Shiller.

The average cost of a 30-year U.S. mortgage has surged this month, climbing to 6.7% from 6.2% at the start of May, according to Freddie Mac, the second-largest U.S. mortgage-finance company, which has about $712 billion of assets.

Figures this week showed home values in 20 metropolitan areas fell 2.1% in April from a year earlier, the biggest decline in at least six years. The median price of a new home slumped 0.9%, with sales of new homes down 16% and the supply of unsold homes at a record 4.43 million.

Housing accounts for about 23% of America’s economy, including the stuff people buy for their houses, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Mass.

“We see the ongoing correction in the housing market and declining home price inflation as significant downside risks to the economy going forward,” New York-based analysts at Deutsche Bank AG, Peter Hooper, Torsten Slok, and Michael McDonough, wrote.

Rising interest rates also threaten property prices in parts of the euro area. With figures on Thursday showing money supply growth unexpectedly accelerated to 10.7% last month, close to its fastest pace in 24 years, the European Central Bank is likely to keep raising its key interest rate, currently at 4%.

“The ECB will increase interest rates to 5% by mid-2008, and this will undoubtedly cause problems for the Spanish and Irish markets,” a London-based economist at ABN Amro Holding NV, Dario Perkins, said

in a research note. “Almost 90% of mortgages in these economies carry a variable rate. Housing is already unaffordable.”

In Britain, the Bank of England has raised its key rate four times in the past year, to a six-year high of 5.5%.

Yet the Nationwide Building Society, Britain’s biggest mortgage lender, said on Thursday that house prices in May advanced at the fastest pace since December. The average price of a home has more than doubled in the past six years, and is now 184,080 pounds, or $368,000.

“What’s continuing to drive the housing market is the fact that, on the whole, interest rates remain relatively low,” one of the Bank of England’s policy makers, Kate Barker, said. The 10-year Britain bond, which partly determines how much homebuyers pay on longer-dated fixed-rate mortgages, yields about 5.1%, down from a 20-year average of 6.2%.

While American homeowners struggle to refinance as lenders scale back borrowing, and as European households bear the brunt of ECB efforts to restrain inflation, Britons seem to have acquired limited immunity to the actions of their central bank by shifting more of their debt to fixed rates.

The collapse of the U.S. subprime mortgage market claims new victims every day.

Cambridge Place Investment Management LLP, founded by Goldman Sachs Group Inc. bankers, Martin Finegold and Robert Kramer, said it will close its $908 million Caliber Global Investment Ltd. fund. Caliber had a loss of $8.8 million in the second quarter on its mortgage and asset-backed debt investments, 60% of which are in the U.S. markets.

Carlyle Group cut its $400 million sale of shares in a fund that buys mortgage-backed debt to $300 million, and trimmed the offer price to $19 a share from a range of $20 to $22. Kia Motors Corp., South Korea’s second-largest automaker, scrapped a $500 million bond sale — the eighth borrower this month to decide financial markets are too volatile for comfort.

At some point, financial executives such as the treasurer of Freddie Mac, Timothy Bitsberger, the chief financial officer of Lehman Brothers Holdings Inc., Chris O’Meara, and the chief executive officer of Merrill Lynch & Co., Stanley O’Neal, may have to eat their self-preserving words about how self-contained the subprime debacle is.

The iPhone, Apple Inc.’s new must-have toy combining a mobile phone with a digital music player, went on sale on Friday to U.S. gadget freaks. Analysts are starting to ponder which European phone company Apple will choose as its partner. Justin Funnell and Paul Sidney at Credit Suisse Group in London reckon Vodafone Group Plc is the front runner.

“The deal seems to be Vodafone’s to lose,” they wrote in a research note last week. Vodafone’s presence in most European markets makes the company easier for Apple to deal with as it enters the handset market for the first time, they said.

AT&T Inc., the largest U.S. wireless service provider, has an exclusive five-year deal with Apple to sell 1,000-song versions of the device in its home market at $499 on two-year plans ranging from $60 to $220 per month.

“The iPhone is, in our view, an operator’s dream,” the Credit Suisse analysts wrote. “We see Vodafone as a trading buy at these levels, ahead of potential news on the iPhone contract in the coming weeks.” They estimate winning the deal may be worth as much as 8 pence a share to Vodafone, which trades at about 166 pence.

Mr. Gilbert is a columnist for Bloomberg News.