* Dalian iron ore futures also retreat
* Spot iron ore at 3-1/2-month top on Tuesday
* China steel consumption seen peaking in medium term -Deltec (Updates prices)
By Manolo Serapio Jr
MANILA, Aug 17 (Reuters) - Shanghai steel futures pulled back on Wednesday after rallying to their strongest level since April, but losses were capped by China's efforts to curb excess capacity in its bloated steel sector that could limit available supply.
China's top economic planning agency said on Tuesday that the country should quicken reduction of capacity in its steel and coal sectors, adding that progress in various regions is uneven. believe the move will surely speed up industry consolidation and capacity reduction in coal and steel sectors," said Helen Lau, analyst at Argonaut Securities in Hong Kong.
China has only cut 47 percent of the 45 million tonnes in capacity that it promised to remove this year.
The most-active rebar on the Shanghai Futures Exchange SRBcv1 closed down 1.5 percent at 2,589 yuan ($390) a tonne. The construction steel product hit 2,687 yuan on Tuesday, the highest since April 25.
Fresh efforts to limit production in China's leading steel producing city of Tangshan amid stricter environmental regulations also supported recent price gains, traders said.
China has excess steel capacity of around 300 million tonnes - triple the annual output of No. 2 producer Japan - and increased efforts this year to tackle the glut come amid anger from rival producers overseas hit by a flood of cheap Chinese steel.
China's steel exports reached 67.4 million tonnes in January-July, up 8.5 percent. TRADE/CN
The recent strength in steel prices has spurred gains in raw material iron ore, with the spot price back above $60 a tonne. But steel's pullback on Wednesday also dragged down iron ore futures.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI climbed 3 percent to $61.80 a tonne on Tuesday, the highest since May 3, according to data compiled by The Steel Index.
On the Dalian Commodity Exchange on Wednesday, January iron ore DCIOcv1 ended 1 percent lower at 426.50 yuan a tonne.
"The short-term outlook for iron ore is positive, with China's stimulus driven infrastructure and housing activity likely to boost steel production growth, iron ore demand, and prices," Atul Lele, chief investment officer at Bahamas-based Deltec International Group, wrote in a report.
"In the medium term, steel consumption is peaking and risks are now materially higher, as capital outflows continue to tighten financial conditions, whilst the recent Chinese stimulus has led to even more significant imbalances." ($1 = 6.6323 Chinese yuan)