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* Shanghai rebar drops 5 pct, sharpest in two months
* Dalian iron ore down 7 pct, coking coal slides 4 pct
* Growing steel supply amid slow demand
By Manolo Serapio Jr
MANILA, April 7 (Reuters) - Chinese steel futures fell more than 5 percent on Friday in the steepest single-day fall in two months, dragging down raw materials iron ore and coking coal, as investors worried about rising steel supply and tepid demand.
The sharp drop in futures has tamed buying interest in the physical market, traders said, as people held back, waiting till prices settle.
The most-active rebar on the Shanghai Futures Exchange was down 5.1 percent at 3,032 yuan ($439) a tonne by midday. The percentage drop was the sharpest since Feb. 3.
"The sudden drop in futures prices is holding back buying interest in the physical market," said a Shanghai-based trader.
Average daily crude steel output in China, the world's top producer, recovered to 1.75 million tonnes over March 11-20 from around 1.6 million tonnes in the first 10 days last month, based on estimates by the China Iron and Steel Association.
That puts the average daily output in the first 20 days of March at 1.72 million tonnes, or equal to the average in February, said Richard Lu from CRU consultancy.
Amid rising supply and slower than expected demand, "end-users don't want to hold stocks" with prices also volatile, said Lu.
Steel's slide caused raw materials to tumble as well. Iron ore for September delivery on the Dalian Commodity Exchange fell 7.1 percent to 525 yuan a tonne.
Stocks of imported iron ore at China's port stocks stood at 132.1 million tonnes as of March 31, according to SteelHome. SH-TOT-IRONINV
A week before, the port inventory reached 132.45 million tonnes, the most since 2004 when SteelHome began monitoring the stockpiles, reflecting slow appetite for the raw material.
That is enough iron ore to build Paris's Eiffel Tower nearly 13,000 times over and some Chinese ports are demolishing old buildings to create more storage space, trading sources have said.
Dalian coking coal was also swept up in the selloff, last down 4.4 percent at 1,276 yuan a tonne, while coke - made from coking coal - slid 4.8 percent to 1,810.50 yuan.
The drop was coking coal's deepest since February, erasing some of this week's gain. On Wednesday, coking coal climbed more than 8 percent - its biggest rally since November - after Cyclone Debbie disrupted shipments from Australia, the biggest supplier of steelmaking coal.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB slipped 0.8 percent to $80.92 a tonne on Thursday, according to Metal Bulletin. ($1 = 6.9009 Chinese yuan) (Reporting by Manolo Serapio Jr.; Editing by Richard Pullin)