NEW YORK - U.S. mortgage applications dipped last week, reflecting reduced demand for home purchase loans even as rates on 30-year loans fell to their lowest since December, data from an industry group showed on Wednesday.

A continuation of lackluster demand for home purchase loans would not bode well for the U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, fell below 5 percent for the first time since the week ended Dec. 18. Low mortgage rates fueled a slight uptick in demand for home refinancing loans last week, with activity reaching its highest level since the week ended Dec. 11.

The MBA's seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week ended Feb. 5, decreased 1.2 percent.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 3.8 percent.

The lowest mortgage rates in decades and high affordability helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.94 percent, down 0.07 percentage point from the previous week, the lowest since the week ended Dec 18.

An all-time low of 4.61 percent was set in the week ended March 27, 2009. The survey has been conducted weekly since 1990. Interest rates were also well above the year-ago level of 5.19 percent.

Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, said they expect 30-year fixed rate mortgages to reach 5.50 percent by the middle of the year and just shy of 6 percent by year-end.

The end to the Federal Reserve's purchase of government-sponsored enterprise mortgage-backed securities, combined with slightly stronger inflationary expectations will cause rates to rise, she said.

The Federal Reserve stops buying mortgage-related securities at the end of March. The Fed's agency MBS and agency debt purchase programs, aimed at lowering borrowing costs, will have reached more than $1.4 trillion.

Home prices will fall, probably until the end of the year, Chen said. The large pipeline of distressed properties that may turn into foreclosure sales weigh down the home price outlook.

There is a great deal of uncertainty over how many properties will end up on the market as a foreclosure sale, however, she said.

The MBA's seasonally adjusted purchase index USMGPI=ECI, a tentative early indicator of home sales, decreased 7.0 percent, while its seasonally adjusted index of refinancing applications USMGR=ECI increased 1.4 percent.

The refinance share of mortgage activity increased to 69.7 percent of total applications from 69.2 percent the previous week. The adjustable-rate mortgage, or ARM, share of activity was 4.5 percent, unchanged from the previous week.

The MBA said fixed 15-year mortgage rates averaged 4.33 percent, unchanged from the previous week. Rates on one-year ARMs decreased to 6.68 percent from 6.70 percent.

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