LONDON, June 13 (Reuters) - Quarterly returns on private equity investments improved slightly in the three months through December 2007, data showed, but stayed close to a third-quarter trough as the sector struggles with the credit crisis.

Fourth-quarter returns were 3.18 percent on average, a survey by financial services group State Street Corp (STT.N: Quote, Profile, Research, Stock Buzz) showed, slightly above 2.26 percent in the third quarter of 2007, but well below 10.89 percent in the year-ago period.

"The overall index return ... lagged significantly behind the fourth-quarter 2006 return ... thereby illustrating the challenging conditions experienced during the latter part of 2007," the group said in a statement on Friday.

Leveraged buyout deals -- by far the biggest part of the private equity industry -- have slowed to a trickle in the wake of the credit crisis, as banks tighten the reins on lending.

Buyout firms borrow heavily to fund deals, typically funding their bids with a majority of debt.

The State Street data are based on client data comprising public and private pensions, endowments and foundations, representing a value of more than $160 billion.

Pressure on valuations was continuing in the fourth quarter, State Street said, though the weak dollar was helping U.S. investors exposed to overseas deals.