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By Joan Gralla and Anastasija Johnson

NEW YORK, April 25 (Reuters) - A U.S. municipal bond credit default swap index is expected to be launched as soon as May 6, creating what is believed to be one of the first derivative benchmarks for this $2.6 trillion market, market sources said on Friday.

The new index offers traders and investors another option to bond insurance, which has fallen out of favor after several companies were threatened with downgrades after having insured subprime mortgage bonds and other risky assets that left them with billions of dollars of losses.

The index will be based on 50 investment-grade muni bonds, excluding tobacco and healthcare debt, according to the website of the company launching it, Markit Group Limited. Markit declined to comment.

Credit default swaps are contracts that allow traders to buy or sell protection against a possible default by a debt issuer. On a global basis, the size of this market was over $62 trillion at the end of last year.

Trading in municipal credit default swaps has skyrocketed since the global credit crunch began last summer.

Volume soared to over $50 billion in the six months after July 2007, according to a Morgan Stanley report in February. A total of about several hundred million dollars traded in municipal credit default swaps in the entire five years before the crisis, the report added.

The muni credit default swap was one of the slowest to develop, partly because the market has an exceptionally low default rate of less than 1 percent.