UPDATE 1-China steel slides as output hits record, iron ore falls

* Dalian iron ore falls nearly 6 pct, Shanghai rebar drops 3 pct

* China steel output hits 74.59 mln tonnes in August

* Physical steel prices remain firm, demand intact -analyst (Adds analyst comment, updates prices)

MANILA, Sept 14 (Reuters) - Chinese steel and iron ore futures fell sharply on Thursday after investors cut positions in both commodities following recent sharp gains, even as underlying demand in the world’s top consumer remained firm.

The selloff came as data showed China’s crude steel output hit a record 74.59 million tonnes in August, trumping the previous all-time monthly high in July, as mills boosted production amid strong profit margins.

The most-active rebar on the Shanghai Futures Exchange fell 3 percent to close at 3,831 yuan ($585) a tonne, retreating further from a 4-1/2-year peak of 4,194 yuan reached on Sept. 4.

Iron ore’s losses were deeper, with the most-traded contract on the Dalian Commodity Exchange tumbling 5.8 percent to end at 510 yuan per tonne. It fell as far as 507.50 yuan, the weakest since July 31.

“The pullback that we are seeing in iron ore is not limited to iron ore itself, but it’s something we are seeing across the industrial metals complex,” said Michael McCarthy, chief market strategist, CMC Markets.

Shanghai-traded copper touched a one-month low, tracking a 1.7-percent price decline in copper on the London Metal Exchange on Wednesday.

McCarthy said the uptrend in prices for both steel and iron ore since late May looks intact and the recent declines show “a corrective move rather than a change in direction for the market”.

Rising steel stocks among Chinese traders and falling inventories of iron ore at the country's ports suggest both steel traders and producers are preparing for stronger steel consumption as construction activity picks up this month and next. SH-TOT-RBARINVSH-TOT-IRONINV

Richard Lu, analyst at CRU consultancy, said physical steel prices remain firm, with spot rebar at about 4,000 yuan per tonne.

“If we’re only talking about the physical market, prices may hold for a while, perhaps may remain strong for another month,” said Lu.

Iron ore for delivery to China's Qingdao port .IO62-CNO=MB rose 0.2 percent to $76.56 a tonne on Wednesday, the highest since Sept. 6, according to Metal Bulletin.

The spot 62-percent benchmark, which has gained almost 44 percent from mid-June, was at a record premium of $29.75 over lower-grade ore with 58 percent iron content .IO58-CNO=MB.

China’s intense environmental clean-up pushed more steel producers to use higher quality material to boost output.

That has helped strengthen the market share of top suppliers Australia and Brazil to more than 80 percent of China’s total iron ore imports, forcing shippers of lower grade material to offer steeper discounts to draw buyers.

$1 = 6.5474 Chinese yuan Reporting by Manolo Serapio Jr.; Editing by Sherry Jacob-Phillips and Joseph Radford