* Sharp falls in open interest in iron ore, rebar futures
* Dalian iron ore fell by 6 pct limit on Tuesday
* Spot iron ore may drop further after Tuesday's 6.5 pct slide (Adds open interest, updates prices)
By Manolo Serapio Jr
MANILA, Nov 16 (Reuters) - Iron ore futures in China slumped more than 6 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 closed down 6.5 percent at 577 yuan ($84) a tonne after falling as much as 9 percent to hit its downside limit of 561.5 yuan. It lost 6 percent on Tuesday.
Open interest, or open contracts, dropped to 1.3 million lots on Tuesday from 2.09 million lots on Nov. 7.
Dalian iron ore 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 fuelled 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 3.9 percent to 2,816 yuan a tonne. Open interest in rebar futures hit 2.3 million lots on Monday, the lowest since May 2014.
Coking coal DJMcv1 rose 0.4 percent to 1,569 yuan a tonne and coke DCJcv1 fell 1 percent to 2,057 yuan. ($1 = 6.8697 Chinese yuan)