* Copper trades below $9,800 a tonne, over $4stocks * 00 off recent record * Hedge fund Red Kite warns prices too high, need to correct 20 pct * Lead rises after leap in canceled warrants ratio to 7 pct (Updates prices) By Nick Trevethan SINGAPORE, Feb 17 (Reuters) - London copper fell 1 percent on Thursday, reversing earlier gains that saw the market back above $9,900 as worries about inflation and the demand-stifling effect of prices near highs kept sentiment in check. Three-month copper on the London Metal Exchange dropped by 1.1 percent to $9,740 a tonne by 0831 GMT, after having touched a record $10,190 on Tuesday. But those high prices are cutting off demand from copper consumers. Metals-focused hedge fund Red Kite said the record highs in copper were unsustainable and prices needed to fall 20 percent or so to attract top buyer China back into the market in a big way. "The price needs to come down to around $7,500 to $8,000 a tonne," Scott Hobart, portfolio manager at HFZ Capital Management Ltd. in Hong Kong, a unit of New York-based Red Kite, said on the sidelines of a hedge fund industry event hosted by Reuters. "It has to come down for China to start restocking on copper and take stockpiles off the physical market. Without China restocking, which is what the market is really hanging its hat on at the moment, stocks will continue to build," Hobart said. Shanghai's most active copper contract dropped 1.3 percent to 74,680 yuan. Prices were expected to fall to 73,850 yuan per tonne as a five-wave cycle has been completed with a correction on the way, said Reuters analyst Wang Tao. A fall from Tuesday's high has adopted a five-wave mode on five-minute chart, signaling a short-term downtrend has established, with a bearish target at 73,850 yuan, the 38.2 percent Fibonacci retracement on the rise from 69,900 yuan to 76,290 yuan. Inflation pressures in China, consumer of 40 percent of the world's copper, and elsewhere, have sparked anxiety amongst investors. Food inflation is a particular problem for China, and higher prices for basic staples could eat into the disposable income of millions of would-be consumers. U.S. core wholesale prices rose in January at their fastest in more than two years, raising some concerns about inflation, but economists said the recovery was too weak for a big spike in consumer prices. Investors are waiting for a batch of data including January's consumer prices and weekly jobless claims later in the day, to assess the pace of the economic recovery. Lead fell 0.3 percent to $2,585, following a fall of 1.6 percent. On Wednesday, LME data showed a 16,000-tonne leap in canceled warrants to 21,575 tonnes or more than 7 percent of the total stockpile The lead market has seen a dominant cash position controlling 50-80 percent of the market, and analysts linked the fresh cancellations, focused on material Antwerp with that. Some speculated that the material may be destined for battery makers dealing with strong demand for auto batteries after a chilly northern hemisphere winter. For a graphic, click: here (Reporting by Nick Trevethan; Editing by Clarence Fernandez)

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