UPDATE 1-US muni bond sales drop 23 pct in 1st qtr -Thomson

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NEW YORK, April 1 (Reuters) - U.S. municipal bond issuance fell 23 percent in the first quarter from a year ago as a global credit crunch made it harder for states and cities to refinance old debt and hurt demand, Thomson Financial said on Tuesday.

U.S. states, cities and counties sold $81.6 billion of bonds in the first quarter to pay for new schools, road maintenance and other public projects compared to $106.5 billion in the same period in 2007, Thomson said in a report.

"We had tremendous volatility which tends to keep issuers away," said Matt Fabian, managing director at research firm Municipal Market Advisers.

The $2.6 trillion U.S. municipal bond market suffered its worst losses on record in February as risky subprime mortgage plays led to the collapse of investor confidence in bond insurers, which guarantee about half of outstanding municipal debt.

Citigroup (C.N: Quote, Profile, Research) was top underwriter for municipal debt with $13.5 billion in sales in the first quarter, followed by Lehman Brothers (LEH.N: Quote, Profile, Research) and UBS Securities LLC (UBSN.VX: Quote, Profile, Research).

Citigroup unseated Merrill Lynch (MER.N: Quote, Profile, Research), which held the top spot a year ago, Thomson said in a report. Merrill slipped to fourth place in the first quarter. Citigroup was second a year ago. (Reporting by Anastasija Johnson; Editing by James Dalgleish)