* Moody's warns of China's fading financial strength
* Biggest percentage drop for Dalian iron ore since May 5
* Iron ore stocks at China ports highest since 2004 (Adds Moody's downgrade, updates prices)
By Manolo Serapio Jr
MANILA, May 24 (Reuters) - Chinese iron ore futures tumbled 7 percent on Wednesday, the steepest single-day drop in more than two weeks, after Moody's cut China's credit rating and on concerns over ample supply as stocks of the steelmaking raw material at the country's ports rose to the highest in at least 13 years.
Iron ore's decline was the sharpest among China's commodity futures after Moody's Investors Service downgraded the country's long-term local and foreign currency issuer ratings, warning its financial strength would erode in coming years as economic growth slows and debt continues to mount. ore "supply is bearish" with the expected pickup in imports, said Hui Heng Tan, analyst at Marex Spectron.
"The continued destocking of imported ore by mills is expected to provide headwinds for prices," Tan said in a note.
The most-traded iron ore contract for September delivery on the Dalian Commodity Exchange DCIOcv1 closed down 7 percent at 455.50 yuan ($66) a tonne, near the day's trough of 452 yuan. It was the biggest decline since the contract slumped 6.3 percent on May 5.
Imported iron ore inventories at China's ports rose to 136 million tonnes last week, the most since 2004, according to SteelHome consultancy. SH-TOT-IRONINV
The decline in Chinese iron ore futures should drag down spot prices further.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB fell 1.9 percent to $62 a tonne on Tuesday, according to Metal Bulletin.
Chinese steel futures slid for a second straight day after hitting a nine-week peak on Monday.
The most-active rebar on the Shanghai Futures Exchange SRBcv1 ended 2.2-percent lower at 3,246 yuan a tonne.
But Morgan Stanley (NYSE:MS) said the sustained fall in Chinese steel stockpiles pointed to strong downstream demand.
Steel product inventories held by Chinese traders in the week to May 19 dropped 5.6 percent from the previous week, Morgan Stanley said in a May 22 report. ($1 = 6.8900 Chinese yuan)