* Shanghai exchange may raise margins on rebar futures - sources
* Recent steel spike not driven by fundamentals - industry group
* Shanghai rebar has surged more than 40 pct from April (Adds Shanghai exchange mulling higher margins and updates prices)
By Manolo Serapio Jr
Aug 11 (Reuters) - Chinese iron ore futures fell nearly 5 percent on Friday in a selloff triggered by a sharp retreat in steel prices amid concerns the Shanghai commodities exchange will lift margins on rebar contracts to fight speculative trading.
The Shanghai Futures Exchange has told its members it may raise margins on steel rebar futures contracts if turnover in one of China's largest derivatives markets remains too high, three sources familiar with the matter said.
Earlier this week, officials from the China Iron and Steel Association (CISA) met steel producers, brokerages and research consultancies, and agreed the recent price spike was "not driven by market demand or reduced market supply".
Instead, some organisations were "over-interpreting, or even misreading" the effect China's environmental policies and clampdown on low-quality steel would have on production capacity in the second-half of 2017, according to a statement from CISA posted on its official Wechat account on Thursday.
The most-active rebar on the Shanghai Futures Exchange closed down 2.7 percent at 3,862 yuan ($579) a tonne. It hit an intraday peak of 4,016 yuan on Thursday, its strongest since March 2013.
"These warnings serve the purpose... to cool down markets or to see some consolidation in commodity prices," Argonaut Securities analyst Helen Lau said in a note.
"We think the government wants to ensure stable development in markets and does not want to see quick boom and bust cycles fuelled by speculation."
Investors latched on to expectations of steep production cuts by Chinese mills in pushing up prices sharply this week. China has ordered mills to cut production by as much as 50 percent in major producing areas such as Hebei province during winter.
In Hebei, steelmakers are required to comply with state- and province-level emission restrictions by Sept. 1 or they will be shut down.
Rebar, a construction steel product, which has risen more than 40 percent from April, gained almost 4 percent this week.
As steel prices retreated, so did iron ore. The most-traded iron ore for January delivery on the Dalian Commodity Exchange fell 4.7 percent to 536 yuan a tonne.
Iron ore for delivery to China's Qingdao port .IO62-CNO=MB rose 1.6 percent to $76.68 a tonne on Thursday, according to Metal Bulletin, tracking gains in futures that day.
It was the highest level since April 6 for the spot benchmark, which has risen 3.5 percent so far this week, on course for its fifth consecutive weekly increase.
$1 = 6.6689 Chinese yuan Reporting by Manolo Serapio Jr.; Editing by Joseph Radford and Sherry Jacob-Phillips