Mortgage applications declined last week as the market braced for another two years of low, short-term interest rates, an industry trade group said Wednesday.

The Mortgage Bankers Association's market composite index — a measure of loan application volume — fell 2.9% on a seasonally adjusted basis from a week earlier. The refinance index fell 3.6% from the previous week and the seasonally adjusted purchase index declined 1.7%.

The refinance share of mortgage activity fell to 80% of total applications, compared to 81.3% the previous week.

"The Federal Reserve surprised the market last week by indicating that short-term rates were likely to stay at their current low-levels until the end of 2014," said Michael Fratantoni, MBA vice president of research and economics. "Longer-term treasury rates dropped in response, and mortgage rates for the week were down slightly as a result."

"Although total application volume dropped on an adjusted basis relative to last week, refinance volume remains high, with survey participants reporting that the expanded Home Affordable Refinance Program contributed to roughly 10% of their refinance activity," according to Fratantoni.

Connecticut saw the largest increase in mortgage refinance applications in December, with demand increasing 80% from November. Maine saw the largest gain in purchase applications, with the state's volume climbing nearly 31%.

Interest rates during the week fell with the 30-year, FRM decreasing to 4.09% from 4.11% the previous week. The 30-year, FRM with a jumbo loan balance fell to 4.33% from 4.39%.

The 15-year, FRM fell from 3.4% to 3.36%, and the 5/1 ARM increased to 2.94% from 2.91%.

Write to Kerri Panchuk.