(Adds data on individual investors, banks)
NEW YORK, Sept 18 (Reuters) - The amount of outstanding U.S. municipal bonds grew slightly in the second quarter, but individual investors continued to pull back from the sector, putting overall holdings at an eight-year low, Federal Reserve data released on Thursday showed.
Individuals, considered the backbone of the muni market, cut their holdings to $1.602 trillion in the second quarter from $1.609 trillion in the previous quarter and $1.665 trillion in the second quarter of 2013.
Ownership of munis by U.S. households has fallen for 14 straight quarters, to the smallest since the first quarter of 2006. Individuals own just 43.9 percent of all munis, the lowest share in at least a decade and about 10 percentage points below its peak level in late 2004.
The Fed adjusted its data for municipal ownership at the start of 2004, rendering earlier market statistics incomparable.
The Federal Reserve does not seasonally adjust the level of outstanding debt, but does seasonally adjust the flow of funds data. That data shows households shed $39.6 billion worth of bonds in the second quarter.
Mutual funds bought $46.5 billion, while banks bought $17.5 billion of municipal bonds in the second quarter, the Fed data showed.
U.S. regulators earlier in September tightened rules on which assets banks can sell in the event of a credit crunch. The rule did not count municipal bonds as "liquid assets," which sparked criticism from states and cities.
Kent Hiteshew, director of the Treasury's newly formed Office of State and Local Finance, said on Wednesday that the Treasury will monitor the impact of this rule on the cost of new municipal debt issuance.
Outstanding U.S. municipal bonds in the second quarter totaled $3.6614 trillion, up from $3.6608 trillion in the first quarter of 2014, the Fed data showed. (Reporting by Megan Davies and Lisa Lambert, additional reporting by Karen Pierog; Editing by Chizu Nomiyama and Dan Grebler)