WASHINGTON (Reuters) - U.S. officials said the number of problem banks and thrifts on their watchlist rose sharply to 416 in the second quarter of 2009 from 305 in the prior quarter, as the industry recorded a $3.7 billion loss.

The Federal Deposit Insurance Corp said on Thursday that the industry swung back to a loss in the second quarter after reporting a $7.6 billion profit in the first quarter, primarily due to costs associated with rising levels of bad loans and falling asset values.

The agency's insurance fund used to safeguard bank deposits dipped 20 percent in the second quarter to $10.4 billion from $13 billion at the end of the first quarter. The decrease in the fund was chiefly caused by an $11.6 billion increase in the money the FDIC set aside for anticipated bank failures.

Nevertheless, FDIC Chairman Sheila Bair said there were signs of economic revival even as the banking industry struggled.

"While challenges remain, evidence is building that the U.S. economy is starting to grow again," Bair said in a statement. "Banking industry performance is -- as always -- a lagging indicator."

Regulators have shuttered 81 banks so far this year, compared with 25 last year, and three in 2007.

"We expect the numbers of problem banks and failures will remain elevated, even as the economy begins to recover," said Bair.

The FDIC's second quarter briefing comes a day after the agency approved new rules on private equity investment in troubled banks, softening an initial proposal that critics had warned could scare away badly needed capital.

The FDIC reported on Thursday that more than one out of four U.S. banks was unprofitable during the second quarter.

The losses came as the industry set aside more money to cover costs associated with deteriorating loans. The bank industry's reserves for loan losses increased by 8.6 percent to $66.9 billion during the second quarter.

However, the industry did show some improvement. Net interest margins, or a bank's cost of funding, improved at a majority of institutions.

Overall capital levels also improved. The industry reported that on average, the leverage capital ratio increased during the quarter to 8.25 percent from 8.02 percent.

The combined assets of "problem" institutions rose to $299.8 billion from $220 billion. Problem banks are troubled institutions whose regulatory rating has been downgraded due to issues related to liquidity, capital levels, or asset quality.

(Reporting by Karey Wutkowski and Steve Eder; Editing by Tim Dobbyn)