NEW YORK, July 29 (Reuters) - Debt protection costs on bond insurers declined on Tuesday following a bailout of struggling bond guarantor Security Capital Assurance SCA.N.

Merrill Lynch & Co MER.N and Bermuda-based reinsurer XL Capital Ltd (XL.N: Quote, Profile, Research) on Monday announced an agreement to cancel billions of dollars of credit default swaps written by SCA and recapitalize the insurer to avert insolvency. For details, see [ID:nN28815].

Debt protection costs on XL Capital Ltd fell 18 percent on Tuesday to about 216 basis points, or $216,000 to insure $10 million of debt for five years, according to Markit Intraday.

Credit default swaps on XL Capital have widened in previous months due to its contingent exposure to SCA, which was almost entirely eliminated through Monday's deal.

XL on Monday announced that it canceled, or commuted, $64.6 billion of its exposure to SCA, a former subsidiary.

"Given the commutation of $64.6 billion of risk, representing 98 percent of SCA exposure, we believe that CDS should trade significantly tighter, given the substantial reduction in the company's contingent liabilities," Barclays Capital analysts said in a report.

They recommended selling XL protection.

Credit default swaps on other insurers also tightened on Monday.

For example, debt protection costs on MBIA Insurance Inc fell to 27.5 percent upfront, or $2.75 million to insure $10 million of debt for five years plus 500 basis points a year, from 33.3 percent upfront on Monday.

Debt protection costs on Radian Group Inc (RDN.N: Quote, Profile, Research) fell to 35.5 percentage points upfront plus 500 basis points a year from 40 percent upfront on Monday, according to Markit. (Reporting by Anastasija Johnson; Editing by Jonathan Oatis)