NEW YORK (Reuters) - Toll Brothers on Wednesday reported sharply lower quarterly profit amid tightening credit standards that the builder said would likely to shrink the number of potential home buyers.

"We, along with many others, are concerned about the dislocation in the secondary mortgage market," CEO Robert Toll said in a statement.

Mortgage rates, especially for jumbo mortgages of more than $417,000, have soared within the past month as credit fears, stemming from a collapse in the subprime market -- those given to borrowers with checkered credit histories -- have spread to loans to higher credited borrowers. The average Toll home sells for more than $620,000.

In the third quarter that ended July 31, Toll's net income fell to $26.5 million, or 16 cents per share, from $174.6 million, or $1.07 per share, a year earlier.

Higher interest income and securities sales helped results beat the average analysts' expected earnings of 5 cents per share, according to Reuters Estimates.

The results include pretax write-downs of $147.3 million for operating communities, land and land options, within the $125 million to $175 million the company had forecast earlier in August. Excluding these items, earnings were 70 cents per share.

Robert Toll said cancellations had reached their highest rate in more than two decades. Reducing home production until the current oversupply is absorbed is a key step to bringing housing markets back into equilibrium, he added.

Home builders have been squeezed as construction has declined over the last year on higher prices, weakening demand and rising interest rates. To weather the severe downturn, home builders have been shoring up their balance sheets and conserving cash.

Toll reiterated that it would not issue any projections, citing uncertainties in the mortgage market, impairments and sales paces.

Problems in subprime lending -- loans to those with sketchy credit histories -- have made it even more difficult for potential buyers, even those with good credit, to get a mortgage.

More recently, fears have spread to higher-rated, secure mortgages, as many lenders raised rates on "jumbo" loans.

Toll's customers typically have relied on jumbo loans for their purchases, but are now facing more cost-prohibitive mortgages or finding it more difficult to obtain financing.

Toll said that through the third quarter, its buyers were generally able to obtain both loans.

"Nevertheless, tightening credit standards will likely shrink the pool of potential home buyers," Robert Toll said. "Mortgage market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes.

"However, we believe that our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles."

Bank of America, which recently downgraded Toll shares to "sell" from "neutral," said Toll's language does not bode well for the current fourth quarter, which so far has seen a more severe tightening of credit.

"We believe this language points to a likely worsening in demand and cancellations at the start of fourth quarter," Daniel Oppenheim wrote in a research note. "We think the lack of liquidity in the mortgage market and resulting higher spreads will negatively impact sales going forward."

Low- or no-documentation-required jumbo loans had accounted for 43 percent of the builder's sales, according to Bank of America.

Toll Brothers shares closed Tuesday at $21.09 and are down 35 percent for the year.

(Reporting by Ilaina Jonas and Lilla Zuill)