DETROIT (Reuters) - An escalating mortgage crisis will push another 1.4 million US homes into foreclosure and drive nationwide property values lower by seven percent next year, according to a report released yesterday by a group representing city mayors.

The report, released by the US Conference of Mayors, predicts states and cities will be left scrambling to make up for lost property tax revenue, particularly in markets such as California and Florida where home values had soared.

The forecast, prepared by the economic consulting firm Global Insight, was released as the non-partisan mayors group began a special meeting in Detroit intended to address the foreclosure crisis and its connection to problems such as neighbourhood blight and crime.

"Not that long ago economists said housing was the backbone of our economy," Trenton, New Jersey Mayor Douglas Palmer said in a statement.

"Today the foreclosure crisis has the potential to break the back of our economy, as well as the backs of millions of American families, if we don't do something soon," said Palmer, a Democrat, who serves as president of the mayors group.

The Global Insight report forecast US homeowners would see property values fall by $1.2 trillion in 2008, with almost half of those overall losses coming in California.

California property values are expected to drop by 16 percent in 2008, the report said, costing the most populous state almost $3 billion in property taxes.

The report said the weakening US property market would have knocked some $676 billion from home values, but another $519 billion in losses could be tied directly to the financial problems facing borrowers unable to meet escalating monthly mortgage payments.

During the property boom of 2004 and 2005, thousands of borrowers with riskier, or subprime, credit took out adjustable rate mortgages that had very low "teaser" interest rates for the initial two years before resetting at much higher rates.

As those interest rates have started to reset, home foreclosure rates have jumped, especially in once-hot real estate markets like Nevada, California and Florida.

In Detroit, home to the depressed US auto industry and the venue of yesterday's conference, residential foreclosure rates have been running at almost five times the national average. That has further depressed property values in an already poverty-torn city that has lost more than half its population in the past 30 years, leaving whole blocks abandoned.

As similar problems spread, the report forecast that the US economy would grow by just 1.9 percent in 2008 with hiring and consumer spending both curtailed.

The mayors group, which got its start lobbying for federal relief during the Depression of the 1930s, represents more than 1,100 US cities with a population of 30,000 or more.