UPDATE 1-U.S. mortgage refinance applications plunge -MBA

(Recasts lead, adds economist comment in sixth paragraph, pending legislation in eighth)

NEW YORK, June 18 (Reuters) - Applications for U.S. home mortgages dropped for the fourth week in the last five as soaring interest rates choked off refinancing opportunities and soured the housing outlook, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 8.7 percent to 508.4 in the week ended June 13.

The MBA's seasonally adjusted index of refinancing applications tumbled last week by 15 percent to 1,378.6 -- its lowest since July 2006. The gauge of loan requests for home purchases declined 4.3 percent to 360.2.

Fixed 30-year mortgage rates averaged 6.57 percent in the week, up 33 basis points from the prior week and the highest since July 2007.

Yields on fixed-income securities that drive mortgage rates have surged this month as a chorus of central bankers, led by Federal Reserve Chairman Ben Bernanke, shed light on the potential for faster inflation in the months ahead. Benchmark 10-year Treasury note yields have climbed almost a full percentage point over the past three months.

"The increase in mortgage rates is decidedly negative for the housing outlook," Michelle Meyer, an economist at Lehman Brothers in New York, said in a research note. "Higher rates strain affordability, suggesting home prices may have to fall further to provide an offset."

The increase in mortgage rates is removing one of the few supports to the U.S. housing market that has been in decline since 2006. Costlier interest rates have hurt the outlook for U.S. homebuilders that have been trying to dig themselves out from burgeoning inventories of unsold homes, the National Association of Home Builders said on Monday.

Rising angst over housing has led U.S. Senate leaders to agree on a bipartisan bill that would establish a $300 billion rescue fund run by the Federal Housing Administration for troubled mortgages. For story, see: [ID:nN17375635].

The only MBA sub-indexes to increase were those that measured applications for government programs run by the FHA and the Veterans Administration. The volume of loans guaranteed by the FHA has soared this year as borrowers locked out of refinancings by lenders who have tightened credit standards scramble to escape high-cost loans. (Reporting by Al Yoon; Editing by Leslie Adler)