* Mills should brace for tough new measures - NDRC official
* 'Don't play wait and see' during crackdown - official
* China to keep focus on capacity cuts, not output curbs
By Muyu Xu and David Stanway
BEIJING, April 14 (Reuters) - China's steel mills need to prepare for an even tougher assault on overcapacity this year as the government bids to make "fundamental" progress in reforming the sector, an official from the country's top planning body told an industry meeting.
"Although capacity reduction targets were achieved early last year, the overcapacity problem in China's steel sector has not fundamentally been improved," said Xia Nong, supervisor at the industry department of the National Development and Reform Commission (NDRC).
Xia described 2017 as a "year of attack" and said the state would make even bigger efforts, warning a gathering of industry officials and executives in Beijing on Thursday that they should plan in advance. Officials at the meeting insisted last year's 65 million tonnes of capacity cuts were already substantial.
"Do not delay, don't play wait and see," Xia said.
The world's biggest steel producing country vowed last year to reduce annual crude steel capacity by 100-150 million tonnes within three to five years.
It aims to close 50 million tonnes this year, and has also vowed by the end of June to completely eliminate low-grade steel furnaces, responsible for as much as 100 million tonnes of illegal substandard production every year.
"We don't permit leaving things to chance, and we don't permit lying low during the crackdown on low-grade steel capacity," Xia said.
Environmental group Greenpeace estimated earlier this year that actual capacity in operation increased by 35 million tonnes in 2016, with much of the closure programme focusing on already defunct plants.
China's steel output increased 1.2 percent to 808.4 million tonnes in 2016, and Greenpeace said the country needed to consider cutting production rather than capacity in order to rein in the sector.
Luo Tiejun, supervisor of the raw materials department at China's Ministry of Industry and Information Technology, rejected that notion, saying Beijing was still committed to letting the market decide production levels.
"China will only cut steel capacity and will not set a level for output," he said. "It is wrong to say that China's steel capacity is increasing."
However, the central government has already launched an investigation into steel firms in the city of Tangshan in Hebei province, focusing on mills that have "cut capacity but actually increased output".
Tangshan, home to dozens of private steelmakers, produced 88.3 million tonnes of steel in 2016, up 6.8 percent on the year - and more than the whole of the United States.
Steel prices rose 76.5 percent in 2016, boosting profit margins and helping mills turn losses into gains, according to data from the China Metallurgical Industry Planning and Research Institute.
With output up 6 percent in the first two months this year, industry watchers say the price recovery may have encouraged some mills to overproduce. (Reporting by Muyu Xu and David Stanway; Editing by Kenneth Maxwell)