By Richard Leong

NEW YORK, Sept 15 (Reuters) - New applications for U.S. home loans fell last week from a four-month high even as 30-year mortgage rates declined to their lowest level since late March, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, fell for the week ending Sept 10 by 2 percent to 678.2 from the previous week's 692.0.

Thirty-year mortgage rates, excluding fees, averaged 5.68 percent, down 0.11 percentage point from the previous week and down 0.23 percentage point from a year ago, the Washington trade group said.

The average 30-year rate is the lowest since 5.49 percent for the week ending March 26.

The weekly demand gauge retreated last week on fewer loan applications to buy homes, according to the Mortgage Bankers Association.

The Washington trade group's purchase index, a gauge of new loan requests for home purchases, fell last week by 4.3 percent to 455.7 from 476.0 in the prior week.

The purchase index, which stayed above the 400 mark, is still running at historically high levels, underscoring the strength of the U.S. housing market, according to analysts.

Last week's decline in purchase loan index was likely a result of families distracted by back-to-school activities, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York.

"They didn't put in the time needed for their mortgage applications," Moulton said, adding that loan activity at his firm so far has been running above last week's level.

REFINANCING RISES

Meanwhile the drop in mortgage rates boosted the Mortgage Bankers Association's seasonally adjusted index on new refinancing applications.

The refinancing rate rose for a second week, by 1.2 percent to 1,972.5 for last week from the previous week's 1,948.9.

The latest figure for the refinancing index is below year-ago's 2,438.5.

The refinance share of mortgage activity rose to 43.2 percent of total applications last week from prior week's 41.4 percent.

Americana's Moulton said his firm has experienced a pickup in refinancing business from so-called subprime borrowers, or people with spotty credit histories.

"We are seeing the subprime market come back in terms of refinancing," he said.

Subprime borrowers are considered riskier than "prime" borrowers. Lenders charge subprime borrowers higher rates and fees to compensate for the additional risk.

Some of his subprime clients, after either improving their credit ratings or enjoyed sharp appreciation on their homes, have sought to refinance their home loans at lower rates, Moulton said.