By Hilary Russ

NEW YORK (Reuters) - New York State tax collections fell $1.3 billion, or 3.5 percent, to $36.9 billion through the first half of fiscal 2016 compared to the same period a year earlier, the state's chief fiscal officer said on Thursday.

Personal income taxes, the state's biggest revenue source, lagged expectations, New York State Comptroller Thomas DiNapoli said in a mid-year report.

New York is not alone. State revenue growth has reversed around the country, dragging down the credit quality of U.S. states even as the national economy continues expanding, the global investment management firm Conning Inc said last week.

In total, U.S. state tax revenues fell 0.7 percent to $493.8 billion in the first six months of 2016 – the first extended decline since the Great Recession, Conning's report said.

It added that depressed oil prices and lower corporate profits were contributing factors to the downward pressure on revenues.

In New York, whose fiscal year 2017 ends March 31, personal income tax collections through the first six months fell below both initial budget estimates and revised projections, DiNapoli said.

Business taxes also fell by 9.8 percent, mostly because of corporate tax reforms in 2015, decreased audit collections and other changes that altered taxpayer behavior, DiNapoli said.

He also had a warning about the nearly $9 billion windfall the state is receiving from fines and legal settlements, much of it from big banks over their role in the housing bubble and subsequent financial crisis.

"The use of some settlement resources for ongoing spending and to boost the state's bottom line may be obscuring New York's true fiscal position, and leaving uncertainty for the commitments already made," DiNapoli said in a statement.

Initially, the state said it would spend much of that unexpected windfall on special capital projects - including a $1 billion expansion of New York City's Jacob Javits conference center and $450 million for the ongoing Tappan Zee Bridge replacement - to be funded through a dedicated infrastructure fund.

Governor Andrew Cuomo's executive budget in January identified $6.4 billion to be transferred to the infrastructure fund. However, under a revised plan that delayed transfers, only about $857 million was actually moved in fiscal 2016, allowing the state's general fund to close with a balance of $8.9 billion.

The state borrowed money to complete the Tappan Zee Bridge until the settlement transfers come in, the report said.

(Reporting by Hilary Russ; Editing by Tom Brown)