* China steel output rises 1.2 pct in 2016
* China Q4 GDP grew 6.8 pct, slightly faster than expected
By Manolo Serapio Jr
MANILA, Jan 20 (Reuters) - Chinese iron ore futures dropped for a third day on Friday, retreating further from a three-year high, with trading activity thinning ahead of the Lunar New Year break late next week.
Many Chinese steel mills replenished stocks of raw material iron ore in previous weeks, traders said, but most of them including traders are now out of the market for an early start to the Spring Festival holiday that begins on Jan. 27.
There was little impact on the futures market this morning from data showing that China's economy grew 6.8 percent in the fourth quarter, slightly ahead of economists' expectation of 6.7 percent. most-active iron ore on the Dalian Commodity Exchange DCIOcv1 was down 0.2 percent at 631.50 yuan ($92)a tonne by midday. The contract was still up nearly 4 percent for the week after touching a three-year peak on Wednesday.
"The market is feeling very optimistic going into the new year because there is good support from the property and infrastructure side," said an iron ore trader in Singapore.
"The stimulus injected last year will last till mid-2017, so there's quite ample amount of credit available."
China's increased government spending helped boost its economic activity last year and spurred demand for steel in the world's top consumer and producer.
China's crude steel output rose 1.2 percent to 808.4 million tonnes last year, recovering after dropping in 2015 for the first time in more than three decades. most-active rebar on the Shanghai Futures Exchange SRBcv1 rose 0.4 percent to 3,275 yuan a tonne, but was still off Monday's one-month peak of 3,418 yuan.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB slipped 1.3 percent to $80.99 a tonne on Thursday, according to Metal Bulletin, having hit a two-year high of $83.65 on Monday.
"With its strong correlation with Chinese steel prices, iron ore will continue to be dictated by policy measures in China," ANZ commodity strategist Daniel Hynes said in a report.
"While the restructuring of the country's steel industry remains on track, we still see some risk of weaker steel prices weighing on iron ore."
($1 = 6.8666 Chinese yuan)