UPDATE 1-US mortgage mortgage applications fell in latest week

(Adds background, analyst comment)

NEW YORK, Sept 24 (Reuters) - Applications for U.S. home mortgages retreated to sluggish levels last week as rising interest rates spoiled a spurt in loan refinancing, according to data published from an industry group on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity dropped 10.6 percent to 591.4 in the week ended Sept 19.

The MBA's seasonally adjusted index of refinancing applications declined 11.2 percent to 2,043.4 last week as the average 30-year mortgage rate surged 0.26 percentage point to 6.06 percent, the MBA said.

Mortgage rates had fallen to the lowest level since May the week before.

The MBA index of loan requests for home purchases fell 10 percent to 342.2.

U.S. Treasury yields, which influence mortgage rates, surged last week from their lowest levels in five months. Investors dumped U.S. debt they had held as a safe-haven as they speculated government intervention in ailing companies and a $700 billion plan to free banks of bad mortgage assets would ease the financial crisis.

The proposed government bailout has become a stark reminder to investors and potential homebuyers of worsening economic conditions. Stock markets have pared gains won after an initial wave of optimism fueled rallies late last week.

"No one is certain how the grand (asset purchase) plan will work, and whether it will be effective," analysts at UBS said in a research note. The plan does not change forecasts for more pressure on housing from rising foreclosures, they added.

Benchmark yields this week have edged lower as investors re-evaluated the impact of government interventions.

Frozen credit markets and tighter requirements for mortgage funding programs of Fannie Mae and Freddie Mac have dulled the impact of falling rates for consumers, analysts said. Tight credit conditions makes the market behave as if rates were 0.3 percentage point higher, UBS said in a note last week. (Reporting by Al Yoon; Editing by Tom Hals)