WASHINGTON (Reuters) - Motorists on U.S. roads applied the brakes hard on driving when gasoline prices peaked over the summer at more than $4 per gallon, according to the latest government figures released on Tuesday.

Two cyclists ride along the 15th Street North West in Washington June 11, 2008. REUTERS/Hyungwon Kang

The 3.6 percent year-over-year decline in miles traveled on all roads in July cemented a downward trend begun nine months ago in response to rising pump prices and economic weakness.

While the June drop was 5 percent, the July drop was still sharp and may be more illustrative of consumer habits and concerns about the economy. July is a usually heavy driving period marked by traditional summer vacations and the Independence Day holiday.

“The decline means Americans are consuming less fuel and emitting less CO2 (tailpipe emissions), which is a positive development,” Transportation Secretary Mary Peters said in an interview with Reuters. “But it is a challenge to how we fund transportation today.”

The miles traveled figure is an informal economic reference for policymakers who sought to make the best of another bad number by touting rising transit figures. The drop in driving heightened concerns about how to pay for road and rail projects, since those employment-creating priorities are financed mainly by gasoline taxes.

Peters, who expects the mileage figure to rebound once consumers lower their transportation costs by purchasing more fuel efficient vehicles, made her comments enroute to Richmond where she announced $30 million in federal grants to states to help finance more than 15 rail projects. Virginia received $2 million.

Average retail gasoline prices at the end of September were nearly 50 cents lower at $3.63 per gallon compared with July, according to figures released on Monday by the Energy Department.

The summer months experienced the most precipitous decline in U.S. petroleum demand in 26 years due to record gasoline prices and a sluggish economy. The decline was the steepest since the 1970s, which also occurred during a period of economic and energy turmoil.

Less driving, combined with the consumer shift toward more fuel efficient vehicles, created a severe shortage this year in federal gasoline tax receipts dedicated to highway construction spending.

Congress plugged an $8 billion gap in the government trust account that funds U.S. highway projects earlier this month after transportation planners warned it was close to running out of money.

Peters said the highway funding shortfall illustrates that federal transportation policies “that rely almost exclusively on gas taxes are failing” and government is in danger of leaving a “sad legacy of old roads, crowded highways and unfulfilled transit ambitions.”

Peters and Virginia Gov. Timothy Kaine, a Democrat, touted private/public partnerships at a news conference as a way to boost infrastructure investment and move away from “unstable gas taxes.”

Despite ongoing market and economic turmoil, Peters said an estimated $400 billion in private capital remains a viable option for investment in highway, rail or aviation infrastructure. “Private investment (including pension funds) is looking for patient, long-term investment,” she said.

This could include direct funding of tolling or construction projects or pooling resources in a national infrastructure bank to fund “the highest value projects,” an idea being discussed in Congress. States would take the lead in selecting projects.