The fall, which represents a 13 percentage point nosedive on 2005 figures, means that just over half (53 per cent) of accepted applicants were domiciled Welsh, up by 5 per cent on 2005.
The drop in English applicants has been put down to a scramble for places by students living in Wales, who benefit from a new flat rate of pound;1,200. This compares with English institutions where all students might have to pay as much as pound;3,000.
But while Plaid Cymru welcomed the growth of students staying within the borders this week, other parties fear it could make the country too insular.
According to the figures, a record-breaking 21,749 applicants from across the UK and abroad were accepted by Welsh institutions last September through the universities and colleges admission system, a 25 per cent hike since 1996 and a two percentage point increase on 2005.
Half were said to be from white-collar backgrounds. The highest intake of students was in biological studies, closely followed by creative arts and design. The total number of overseas students accepted in Welsh institutions in 2006 was 1,663, 8 per cent of the cohort.
An Assembly government spokesperson said it was great that so many students wanted to study in Wales. "This shows that potential students recognise the high standards of courses provided by top-class institutions and the fantastic quality of life available here in Wales," he added..