UPDATE 1-U.S. municipal bond market contracts slightly to $3.726 trln

Sept 20 (Reuters) - The U.S. municipal bond market shrank slightly in the second quarter of 2012, to $3.726 trillion from $3.732 trillion the previous quarter, according to Federal Reserve estimates released on Thursday.

The current amount of outstanding debt issued by states, municipalities, authorities and others is slightly lower than it was during the same quarter in 2011, when it stood at nearly $3.751 trillion, according to the Fed.

For the fifth quarter in a row, households shed municipal bonds, jettisoning $70.5 billion of the debt in the second quarter of 2012 after dropping a revised $204.6 billion in the first quarter.

At the same time, banks, property-casualty insurance companies and mutual funds all acquired municipal bonds. In the second quarter, banks gained $81.4 billion, property-casualty insurance companies $2.2 billion and mutual funds $83.3 billion.

State and local government retirement funds also acquired municipal bonds, adding $7.8 billion in the second quarter of 2012.