* 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 official delivered the sternest warning to date about surging British house prices on Thursday, saying it would be "dangerous" to ignore the momentum that is building up in the market.
The BoE would have to decide in coming months whether to cool the recovery, Deputy Governor Jon Cunliffe said on Thursday.
It was unclear if the market was heading for a soft landing or a major overshoot in prices that ends with a crash, he added.
"It would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year," Cunliffe told a banking industry dinner. "This is a movie that has been seen more than once in the UK."
Mortgage lender Nationwide said on Thursday that British house prices last month recorded their biggest annual rise since the start of the financial crisis in 2007.
BoE Governor Mark Carney and other top officials have previously played down talk of a property bubble, saying transactions remain below the level before the crisis.
However, Carney warned late last year that Britain's housing market could heat up with "warp speed."
The BoE is hoping to avoid having to raise interest rates from their record low of 0.5 percent as the British economy continues to recover from the financial crisis. Instead, the Bank has pointed to measures it could use to restrain credit.
Two senior BoE officials faced repeated questioning this week from lawmakers on whether a property bubble was emerging in Britain to undermine financial stability.
Cunliffe sits on the Bank's Financial Policy Committee (FPC), which can force banks to hold more capital or ask regulators to take other types of action. It is due hold its next meeting in June.
"Whether and how to act further if, following the pause of the last couple of months, momentum continues to build, will be the most challenging judgement the FPC will have to take in the coming months," Cunliffe said.
The FPC was formally launched last year to plug a supervisory 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 in the form of mortgages, are now better placed to handle a major housing shock, while home loan underwriting standards have been toughened up but it was too early to say if this was working.
Cunliffe said FPC was looking at whether higher property prices 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 risks to stability identified," he said.
(Editing by William Schomberg and Mark Heinrich)