* NZ dollar drops 1.5 pct, Fonterra units slump near 6 pct
* NZ Prime Minister questions delay disclosure
* China suspends import of some Fonterra products
By Gyles Beckford
WELLINGTON, Aug 5 (Reuters) - Fonterra's unit price and the kiwi dollar slid on Monday after the dairy giant warned of potentially contaminated products, raising safety concerns that threaten New Zealand's $9 billion annual dairy trade and prompting China to halt imports.
Fonterra, the world's biggest dairy exporter, said at the weekend that it had found bacteria in some products that could cause botulism. It said contaminated 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 the import of some dairy products from New Zealand and Australia, New Zealand's Ministry of Primary Industries said. Food producers including Danone said they have recalled products that may have contained the contaminated whey.
Prime Minister John Key questioned why Fonterra took so long to disclose the latest 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.
He said Fonterra was New Zealand's flagship and the issue went right to the "heart of undermining consumer confidence".
Nearly 90 percent of China's $1.9 billion in milk powder imports last year originated in New Zealand, with the lion's share coming from Fonterra, which manufactures milk powder for other companies to sell in China. It has been planning to launch its own branded milk formula in the country.
This is the second contamination issue involving Fonterra this year. In January it said it had found traces of dicyandiamde, a potentially toxic chemical, in some of its products.
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.
Dairy produce accounts for about a quarter of New Zealand's NZ$46 billion ($36 billion) annual export earnings, and the currency is sensitive to Fonterra's fortunes.
"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 $0.7755 against the U.S. dollar.
New Zealand's Ministry for Primary Industries (MPI) said China had not imposed a blanket ban, but had suspended imports of Fonterra-produced whey powder and milk powder, and increased inspection of New Zealand dairy products.
"This is a measured, targeted and appropriate response under the circumstances," MPI's acting director-general, Scott Gallacher, told reporters.
He said MPI was trying to clarify a reported Russian ban on all New Zealand dairy imports. Danone said it was recalling specific batches of four infant formula products in Malaysia, while Vietnam ordered a recall of suspect products.
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 4.1 percent lower at NZ$6.83.
Fonterra said it had yet to hear officially of any ban. It said there had been no adverse health reports and that much of its produce, including whole and skim milk powders, yoghurt, cheese, and butter, did not contain the whey product.
"There have been no confirmed reports of any illness linked to consumption of the affected whey protein," it said in a statement to the New Zealand stock exchange.
Fonterra's chief executive, Theo Spierings, is due to give a news conference in Beijing later on Monday.