* NZ dollar drops 1.5 pct, Fonterra units slump near 9 pct
* NZ Prime Minister questions delay disclosure
WELLINGTON Aug 5 The New Zealand dollar and units in dairy giant Fonterra's shareholders' fund slid on Monday after bacteria that can cause botulism was found in some dairy products, raising safety concerns about the country's top export earner.
Fonterra, the world's biggest dairy exporter, said over the weekend that contaminated New Zealand-made whey protein concentrate had been exported to China, Malaysia, Vietnam, Thailand and Saudi Arabia and used in products including infant milk powder and sports drinks.
In response, China has halted all milk powder imports from New Zealand and Australia, New Zealand Trade Minister Tim Groser said. Some food producers including Danone said they have recalled products that may have contained the contaminated whey.
Dairy produce accounts for about a quarter of New Zealand's NZ$46 billion ($36 billion) in annual export earnings, and the currency is sensitive to Fonterra's fortunes.
Prime Minister John Key questioned why Fonterra took so long to disclose the contamination, which affected product made in May 2012.
"When ... your whole business is about food safety and food quality, you think they'd take such a precautionary view to these things and say if it's testing for some reason in an odd way that (the product) would just be discarded till they're absolutely sure it's right," Key said on Radio New Zealand.
He said Fonterra was New Zealand's flagship and the issue went right to the "heart of undermining consumer confidence".
The New Zealand dollar fell nearly 2 U.S. cents to a one-year low of $0.7670. It was also weaker against most other major currencies and on a trade weighted basis was down 1.1 percent against a basket of currencies.
"Further reaction is possible but will depend on the nature of fresh information which unfolds," said Westpac senior currency strategist Imre Speizer. "Indeed, reaction reversals are possible if the scale of the issue is less than media reports initially implied."
The kiwi last traded at $0.7750/60 against the U.S. dollar.
Units in Fonterra's Shareholders Fund, which offer outside investors exposure to the cooperative's farmer shareholder dividends, plunged as much as 8.7 percent before trading 5.9 percent lower at NZ$6.70.
Fonterra issued a statement to the New Zealand stock exchange saying it had yet to hear officially of any product ban.
"As far as Fonterra is aware, the New Zealand Government is working with Chinese authorities to determine the scope of the reaction, and no official notification has been received," it said.
Fonterra's chief executive, Theo Spierings, flew to China on Saturday and is expected to give a news conference later on Monday.