* Dalian iron ore has dropped 15 pct from 33-month peak
* More mill closures in Hebei on anti-pollution measures -Argonaut
By Manolo Serapio Jr
MANILA, Nov 17 (Reuters) - Iron ore futures in China fell 3 percent on Thursday, stretching steep losses to a third day, as investors cashed in on recent rapid gains with open contracts dropping to the lowest level since May.
China's iron ore futures have dropped 15 percent since hitting a 33-month high on Monday in a speculator-driven rally in commodities that forced Chinese exchanges to hike trading fees to tame prices. most-traded iron ore for January delivery on the Dalian Commodity Exchange DCIOcv1 was down 3 percent at 556 yuan ($81) a tonne by midday. It peaked at 656.50 yuan on Monday, its strongest since February 2014.
"Where market gets strong momentum in one direction or another you can get speculators joining in and if they get a sniff of a change the resulting corrective action can be quite dramatic and I suspect that's what we're seeing here," said Michael McCarthy, chief market strategist at CMC Markets.
As prices tanked, open interest, or open contracts, on Dalian iron ore futures slid to 1.2 million lots on Wednesday from 2.09 million lots on Nov. 7.
The losses in futures had pulled down spot iron ore prices, with the benchmark 62-percent grade for delivery to China's Qingdao port .IO62-CNO=MB slipping 0.4 percent to $72.42 a tonne on Wednesday, according to data from Metal Bulletin.
The spot benchmark touched a two-year high of $79.81 on Nov. 11.
The decline in steel futures was more modest compared with iron ore amid expectations of tighter Chinese supply as Beijing pushes ahead with anti-pollution measures that had forced some mills to halt output.
Air quality in China's smog-hit northern regions, which include the capital Beijing, worsened in October despite overall improvements over the course of the year, the Ministry of Environmental Protection said on Monday. northern Hebei province, the country's top steel-producing province, will suspend production of steel, coke and cement for several days to combat pollution, said Argonaut Securities analyst Helen Lau.
"Looking ahead, in the near term, we expect China's steel market to remain tight due mainly to production suspension in response to worsening pollution," Lau said in a note.
Rebar, a construction steel product, was last down 0.6 percent at 2,772 yuan a tonne on the Shanghai Futures Exchange SRBcv1 , off a session low of 2,738 yuan.
($1 = 6.8691 Chinese yuan)