WASHINGTON (AP) _ Mortgage rates fell sharply this week, approaching the lowest level in 18 years.

The Federal Home Loan Mortgage Corp. said the average rate on standard 30- year, fixed-rate mortgages dropped to 8.29 percent. That was down from 8.48 percent last week and the lowest since the average hit an 18-year low of 8.23 percent during the week ending Jan. 10.

On one-year adjustable-rate mortgages, lenders were asking an average initial rate of 5.69 percent, down from 5.78 percent last week and the lowest since the corporation began tracking ARMs in 1984.

The rates do not include add-on fees known as points.

The reduction came during a week when financial markets were anticipating a move from the Federal Reserve, which Thursday cut its discount rate to 3 percent, a 29-year low.

Banks in response cut their prime rate to 6 percent, which serves as a benchmark for many consumer rates, including adjustable-rate mortgages.

Meanwhile, the maximum rate on home mortgages insured by the Department of Veterans Affairs will drop to 8 percent, effective Monday, the agency said Thursday.

The one-half percentage point drop, the first change in more than four months, returns the maximum rate for fixed-rate loans to the cap in effect between Dec. 20 and Feb. 24.

Anthony J. Principi, the VA's deputy secretary, said, ''The drop will have a practical effect on the economy by allowing more veterans to qualify for loans.''

Also effective Monday, the VA will cut the cap on other loan rates by half a point. The rate on graduated payment mortgages will be 8.25 percent; on home improvement loans, 9.5 percent; mobile homes, 10.5 percent; on mobile home lots, 10 percent, and on combined mobile home and lot loans, 10 percent.

The VA said during the 12 months ended last September, it guaranteed 181,000 home loans totaling $15.4 billion.