UPDATE 3-U.S. refiners run at slowest rate since 2005

(Updates with details)

NEW YORK, March 26 (Reuters) - U.S. refiners have slowed fuel production to the lowest rate since they were battered by hurricanes in 2005 even as pump prices hit all-time highs, according to government data released on Wednesday.

Experts said the drop-off in domestic output was due to thin profit margins in the refining industry amid high costs for crude, and could lead to an increase in gasoline prices to over $4 a gallon this summer driving season.

"Given the high price of crude and likely refiner efforts to increase their margins, the possibility exists for gasoline to suffer substantial increases," the Consumer Federation of America said in a report.

U.S. retail gasoline prices hit a record $3.26 a gallon last week, while diesel struck a record $4.06 a gallon, according to the Lundberg Survey of about 7,000 gas stations released on Sunday.

Refinery utilization rates fell last week by 1.6 percentage points to 82.2 percent of capacity, the lowest since Oct. 21, 2005, after hurricanes Katrina and Rita flooded several plants along the Gulf Coast, according to the U.S. Energy Information Administration.

"The main feature in the data from our vantage point was the 1.6 percentage point cut in (refinery) runs that appeared to be of the voluntary or discretionary variety due to poor margins," said energy analyst Jim Ritterbusch of Ritterbusch and Associates.

Valero Energy Corp (VLO.N), the nation's biggest oil refiner, said earlier this week that it had cut back production from its gasoline making units across the United States to 73 percent of capacity because of poor profit margins.

But a spokesman for the San Antonio-based company said on Wednesday that the cuts in fuel production were temporary and could be reversed if profit margins improve.

Simple refining profit margins CL321-1=R have more than doubled since last week as oil prices have pulled back from their record heights, but margins remain more than 30 percent below last year at this time.

The cutback in U.S. refinery activity contributed to a larger-than-expected decline in gasoline inventories last week of 3.3 million barrels -- the second weekly decline in a row after supplies hit a 15-year high. [EIA/S] (Reporting by Richard Valdmanis, editing by Marguerita Choy)