U.S. credit quality continued to deteriorate in the first half of the year as defaults spiked and recoveries plunged, suggests new research from Fitch Ratings.

The credit rating agency reports that the U.S. high-yield default rate rose to 9.5% in the first half, up from 2.4% a year ago. At the same time, recovery rates on defaulted bonds and loans have dropped sharply, it says. Loan recovery rates are running well below historical trends, Fitch notes.

Fitch’s research finds that recovery rates are being affected by typical cyclical and industry specific challenges, but that there are also new stresses related to the nature and severity of the current downturn. For example, it says that aggressive underwriting in the leveraged finance market is playing a role in current recovery trends.

“The weak economy and still difficult funding conditions are having an unwelcome dual negative effect on credit losses — driving up corporate defaults and simultaneously depressing recovery rates,” said Mariarosa Verde, managing director and head of Fitch Credit Market Research.

Fitch predicts that defaults, and the grim recovery rates, will not ease in 2009. It also expects the U.S. high-yield default rate is expected to end the year in a range of 15%-18%.