WASHINGTON, July 16 (Reuters) - U.S. homebuilder sentiment unexpectedly fell in July, weighed down by economic uncertainty and high mortgage rates amid conflict in the Middle East, a survey showed on Thursday.

The National Association of Home Builders/Wells Fargo Housing Market index dropped two points to 34 this month from an upwardly revised reading of 36 in June. It was the 15th straight month that the index remained below 40, the longest such stretch since 2012. Economists polled by Reuters had forecast the index holding steady at a previously reported estimate of 35.

"Many potential buyers remain on the sidelines as they wait for lower mortgage rates, more certainty on inflation and a clearer economic outlook," said NAHB chairman Bill Owens.

Mortgage rates are likely to remain elevated amid renewed hostilities between the United States and Iran following the collapse of a fragile ceasefire last week.

The NAHB welcomed a bipartisan housing affordability legislation recently passed by the U.S. Congress, which includes measures to restrict single-family homeownership by investment firms and waive or ​speed up environmental reviews for construction projects. The bill became law over the weekend despite President Donald Trump not signing, demanding that a separate voting bill be passed.

"Looking ahead, the newly enacted housing law is a positive step that will help expand housing supply and lower overall housing costs, although more policy change is needed at the state and local level," said NAHB chief economist Robert Dietz.

The share of builders reporting cutting prices increased to 37% from 35% in June. The average price reduction was unchanged at 6%. The use of sales incentives rose to 63% ​from 62% in June, marking the 16th consecutive month this share has reached 60% or higher. 

The survey's measure of current sales conditions fell one point to 37, while its gauge of future sales dropped two points to 43. A measure of prospective buyer traffic slipped two points to 23.