NEW YORK (Bloomberg) - Financial Security Assurance Inc.'s share of insured bonds sold in the US municipal market last month almost tripled, as the use of such guarantees backing new debt issues declined.

Financial Security, known as FSA, insured $3.8 billion of municipal bonds in January for a 69.7 percent market share, up from 24.5 percent during all of last year, Merrill Lynch & Co. said in a report yesterday, citing data compiled by Thomson Financial.

Assured Guaranty Corp. guaranteed 22.6 percent of the market last month, up from 1.9 percent in 2007.

FSA and Assured are the two municipal-bond guarantors that have maintained AAA ratings with stable outlooks from the three major credit-rating companies.

The value of guarantees from rival insurers has dropped, raising yields, amid losses related to their coverage of non-municipal debt.

"What was once a homogenous market has now become multi-tiered, as insured muni-bond ratings and yields diverge," Phil Fischer, municipal strategist at Merrill in New York, said in the research report.

"FSA and Assured Guaranty have largely been the insurers of choice for new bonds."

State and local government borrowers and the underwriters selling the debt had in recent years bought insurance for roughly half of all bond sales to reduce interest costs and help homogenise a market with tens of thousands of issuers.

Out of $19.5 billion in long-term municipal debt sales in January, 28 percent carried corporate insurance against default, compared with 46 percent during the previous 12 months, based on Thomson data.

FSA, a New York-based unit of Brussels-based Dexia SA, extended its lead in the new-issue market, while 2007's next- busiest insurers sought to raise capital to defend their top grades against losses linked to sub-prime-mortgage debt.

Ambac Assurance Corp., part of Ambac Financial Group Inc., insured $195 million of municipal bonds sold in January for a 3.5 percent share, down from 23.7 percent last year, Thomson data show.

The company's insurer rating was cut to AA from AAA by Fitch Ratings last month.

MBIA Inc.'s municipal-bond insurance unit's share dropped to 2.1 percent from 23.4 percent. Fitch, Standard & Poor's and Moody's Investors Service all have MBIA Insurance Corp.'s ratings under review for reduction.

FGIC Corp.'s Financial Guaranty Insurance Co. did not win any new-issue business in January after holding 15.6 percent of the market in 2007, according to Thomson data.

S&P and Fitch withdrew the unit's AAA ratings two weeks ago.

Assured, a New York-based unit of Bermuda-based Assured Guaranty Ltd., insured $1.2 billion of deals during the first month of the year, equal to a third of its new-issue business during the previous 12 months.

Municipal bonds with Assured's guarantee now have lower relative yields than those with policies from Ambac and MBIA, Merrill data show.

That contrasts with three months ago when Assured's yield spread was wider than the two guarantors that have insured the most debt, including obligations beyond the municipal market.