NEW YORK (Reuters) - U.S. mortgage applications fell for a second consecutive week, hitting their lowest level in nearly 6-1/2 years despite a sharp drop in interest rates, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications USMGM=ECI for the week ended June 20, which includes both purchase and refinance loans, dropped 9.3 percent to 461.3 -- the lowest level since the week ended December 28, 2001.

The report offers additional evidence of a U.S. housing market that is suffering one of the worst downturns in its history. Significantly tighter lending standards and an unwieldy supply of homes for sale are some of the factors preventing the U.S. housing market from rebounding out of its two-year-long slump.

In a separate report on Wednesday, the government said U.S. sales of newly built single-family homes dropped 2.5 percent in May and more than 40 percent from a year ago.

The median sale price fell 5.7 percent in May from a year earlier to $231,000, the U.S. Commerce Department said.

"The big drop in median home prices reflects the pickup in foreclosures which would cause a major repricing in homes," said Christopher Low, chief economist at FTN Financial. "We ought to see a new equilibrium in demand and supply in the next year or so."

The frenzy of foreclosures hitting the market is aggravating matters adding to the unsold home inventory and depressing home prices nationwide, analysts say.

The jump in foreclosure sales explains part of the sharp drop in home prices since foreclosures typically sell at about a 20-percent discount to the market, according to Michelle Meyer, an economist at Lehman Brothers in New York.

"Foreclosures and falling home prices are mutually reinforcing," she said in commentary published on Tuesday before the mortgage and sales reports were issued.