By Kylie MacLellan and William James
LONDON (Reuters) - Worries about the economic impact of leaving the European Union hit Britain's property market and drove the pound to a new 31-year low on Tuesday as Conservative members of parliament began voting for a new prime minister.
Interior minister Theresa May and Andrea Leadsom, a junior energy minister, emerged as early front-runners to replace David Cameron, who has said he will step down after Britons voted on June 23 to break away from the EU.
The drawn-out selection process will run until September, but signs are multiplying that concerns about the impact of 'Brexit' on trade, investment and business confidence are already hitting the economy.
Aviva Investors said it had suspended trading in its UK property fund because of "extraordinary market circumstances", a day after Standard Life Investments took similar action following a rush by investors to withdraw money. Shares plunged in other property-related funds, and asset managers and insurers were also hit.
High street retailer John Lewis said sales growth in its stores had slowed in the week after Britain's vote to leave the EU, though the data was clouded by the impact of summer promotions and year-on-year weather comparisons.
The pound, which has borne the brunt of market concerns about potential damage to the British economy, fell below $1.31 for the first time since 1985, and is now trading about 12 percent below its pre-referendum levels.
"There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging," the Bank of England said, announcing measures to encourage banks to keep lending.
Voters were bombarded in the run-up to the referendum with warnings from Cameron and a host of financial institutions and think-tanks that Brexit would plunge Britain into a self-inflicted recession by jeopardizing its access to the EU's tariff-free single market.
The Leave campaign derided such arguments as 'Project Fear', arguing Britain would prosper by regaining 'independence' from Brussels and freeing itself to set its own laws, clinch its own trade deals and set a cap on immigration - something it cannot do under EU rules allowing free movement throughout the bloc.
With the government and Labor opposition both thrown into disarray by the vote, Conservative lawmakers began casting their ballots on Tuesday in the first of a series of votes to whittle down the field of five candidates to replace Cameron.
May, who has run the security and law-and-order portfolio in Cameron's cabinet for six years, is the bookmakers' favorite and enjoys the greatest backing among parliamentarians.
Her rival Leadsom has no cabinet experience, but has the advantage of emerging on the winning side in the referendum, where she helped lead the campaign for a Leave vote whereas May was in favor of staying.
Leadsom, 53, who had a 25-year career in financial services before turning to politics, also received a boost on Monday when former London Mayor and leading Brexit campaigner Boris Johnson gave her his backing.
If May or Leadsom were chosen, this would give Britain its second female prime minister after Margaret Thatcher.
The other leadership contenders are work and pensions minister Stephen Crabb, former defense minister Liam Fox and justice minister Michael Gove, a Leave campaigner who caused high political drama last week by turning against his ally, Johnson, and driving him from the race.
Among the issues dividing the rivals are whether to offer guarantees to EU nationals already living and working in Britain that they are welcome to stay.
Leadsom and Crabb are in favor, saying these people should not be used as bargaining chips. May argues it would be a mistake to offer guarantees without securing reciprocal rights for Britons living in other EU countries.
One of the candidates will be eliminated on Tuesday. The next round of voting will then take place on Thursday and the process will continue until just two candidates remain. The leader will then be elected by about 150,000 Conservative Party members across the country.
A poll for the Conservative Home website put support among members for May on 37 percent, with 38 percent backing Leadsom.
(Additional reporting by Elizabeth Piper, Michael Holden, Vikram Subhedar, David Milleken, Huw Jones, William Schomberg and James Davey; writing by Mark Trevelyan, editing by Peter Millership)