US soybean futures dropped capping a weekly decline of 4.9 per cent amid worries that China's steps to fight inflation would limit demand in the world's top soy buyer.

China's decision to sell some soy oil from state reserves pressured grain markets all day, as did its announcement that lenders must keep more reserves with the Central Bank.

Losses accelerated when the US Environmental Protection Agency said it would delay a decision on allowing a higher ethanol blend in gasoline for older cars.

Prices for corn, the main US feedstock for ethanol, tumbled on the EPA news, which
traders viewed as threatening to biofuel development.

Grain markets were volatile all week as China moved to rein in inflation running at a 25-month high. Higher interest rates in China would probably limit demand for grains and soy.

Soybeans notched their biggest weekly decline in seven weeks. 'Any time you have China talking about stemming inflation, the soybean complex takes it on the chin the most because that is the product they are buying from the United States,' said Jason Ward, market analyst with Northstar Commodity Investment in Minneapolis, Minnesota.

'If China slows down its growth, it would be way more soybean impactful than it would be corn.' 

China said it will sell soy and vegetable oils from state reserves at weekly auctions starting next week, aiming to boost supplies and stabilize prices.

Also, for the second time in two weeks, China ordered lenders to lock up more money with the central bank, stepping up its inflation-fighting effort.

Profit taking also pressured soybeans the day after a rally sparked by optimism Ireland's debt woes may ease. The rally continued early in the overnight Globex trading session but prices fell sharply after China's announcement.

Chicago Board of Trade soybean futures for January delivery closed down 40-1/2 cents to $12.01-1/2 a bushel.

'The Chinese are adamant about controlling food inflation and they will do what they need to do,' said Garry Booth, a trader with MF Global Australia.

Corn was 21 cents lower at $5.20-3/4 a bushel. For the week prices fell 2.5 per cent. 'I would view this as all related to that EPA decision,' said Rich Nelson, analyst for Allendale. 'This was a surprise.'

Setbacks in expanded biofuel use will cut corn demand as ethanol producers wait to see if older cars will be allowed to use gasoline with a 15 percent ethanol blend.

'Psychologically it is bearish for corn because it further delays the potential increased use of corn to produce ethanol,' said Shawn McCambridge, analyst for Prudential Bache
Commodities.

Wheat futures also fell, following corn and soybeans, but declines were limited due to concerns about dry weather harming crop development in the western US Plains.-Reuters