(Recasts with biggest weekly drop, add details, figures and background)
NEW YORK, March 22 (Reuters) - U.S. money market fund assets recorded their biggest weekly drop in two months following the Federal Reserve's widely expected interest rate by a quarter percentage point last week, the Money Fund Report said on Wednesday.
Money fund assets declined by $25.76 billion to $2.626 trillion in the week ended March 21, marking its biggest decrease since $27.08 billion in the Jan. 17 week.
Taxable money market fund assets decreased by $25.78 billion to $2.495 trillion, while tax-free assets increased by $18.10 million to $131.10 billion, according to the report, published by iMoneyNet.
The week's outflow nearly all came from institutional government money funds which lost $28.67 billion, falling to $1.514 trillion in the latest week.
The iMoneyNet Money Fund average 7-day yield for taxable money-market funds increased to 0.36 percent from 0.29 percent the prior week.
There were government funds for institutional investors with yields 0.40 percentage point above the average.
One institutional prime fund, which can invest in riskier securities, offered a yield just above 1.00 percent in the latest week, iMoneynet data showed.
The iMoneyNet Money Fund average 7-day yield for tax-Free and Municipal money-market funds jumped from 0.20 percent last week to 0.25 percent as of March 20.
A week ago, the Fed increased key short-term rates to a range of 0.75-1.00 percent, while it signaled it will remain on track for possibly two more rate increases in 2017. (Reporting by Richard Leong; Editing by Sandra Maler)