* Dalian iron ore fell by 6-pct limit on Tuesday
* Spot iron ore may drop further after Tuesday's 6.5-pct slide
By Manolo Serapio Jr
MANILA, Nov 16 (Reuters) - Iron ore futures in China slumped 7 percent on Wednesday, falling sharply for a second session amid further losses in steel prices as investors pared bullish bets in a commodity still hit by excess supply.
Weaker futures could again pull down spot iron ore prices, which slid 6.5 percent on Tuesday as Chinese buyers retreated after a rapid rally that lifted the spot benchmark to a two-year high last week.
The most-traded January iron ore on the Dalian Commodity Exchange DCIOcv1 was down 7 percent at 574 yuan ($84) a tonne by 0255 GMT after falling as far as 565.50 yuan. It lost 6 percent on Tuesday.
The contract had raced to a 33-month peak of 656.50 yuan on Monday in a rally driven by speculative investors in China. But they began cashing out of commodity futures on Tuesday amid concerns regulators may tighten curbs further to tame price swings. gone up so much and it's overbought so this retracement is very much expected, it's just that it's very severe," Kelly Teoh, iron ore derivatives broker at Clarksons Platou Futures, said on the drop in Dalian futures.
Unlike coal whose price surge was fueled by limited supply in China after the government shut mines to curb a glut, stockpiles of iron ore at Chinese ports remain near a two-year high.
Imported iron ore stocked at the ports stood at 107.75 million tonnes on Nov. 11, not far below the previous week's 108.6 million tonnes which was the most since November 2014, according to data tracked by SteelHome consultancy.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB fell 6.5 percent to $72.68 a tonne on Tuesday, data from Metal Bulletin showed. The spot benchmark touched $79.81 on Nov. 11, the highest since October 2014.
The rally in iron ore was also fueled by increased appetite among Chinese mills for high-grade material so they can use less coking coal.
"We expect iron ore prices may trade at elevated levels until year-end so long as coking coal prices remain high. But that looks like something close to around $60/tonne than current spot prices," Commonwealth Bank of Australia analyst Vivek Dhar said in a note.
Steel futures fell sharply for a third day running. Rebar on the Shanghai Futures Exchange SRBcv1 dropped 5 percent to 2,785 yuan a tonne.
Coking coal DJMcv1 slipped 1.6 percent to 1,538 yuan a tonne and coke DCJcv1 fell 2.3 percent to 2,030 yuan.
($1 = 6.8661 Chinese yuan)