Updates prices at 1600 GMT

By Eric Onstad

LONDON, May 24 (Reuters) -Copper prices dropped on Friday as worries about higher interest rates and soft physical demand in China curbed the appetite of investors who had sent prices to record highs.

Three-month copper on the London Metal Exchange CMCU3 fell 0.8% to $10,331.50 per metric ton by 1600 GMT.

"The rally will likely continue in the medium to long term, but in the short term we have to respect the fundamentals," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.

LME copper touched a record high of $11,104.50 a ton on Monday, driven by speculators and computer-driven funds, but is down about 3%on a weekly basis, on track for the worst week since the week ended Feb. 9.

"We have to accept that the latest rally has driven by financial investors, not by physical traders, in fact they've been selling into it, given the softness we're seeing in Chinese data, and that didn't improve at all this week," Hansen added.

Physical demand in China, the world's biggest copper consumer, has been dampened by the high prices. The usual premium to import copper into China has been flipped into a discount since mid-May. SMM-CUYP-CN

Also curbing metals prices has been robust U.S. and German economic data that bolstered prospects of interest rates staying higher for longer on both sides of the Atlantic.

"We've been looking for support in the metals space from the prospect for restocking as interest rates started to come down, but the prospect of U.S. rates being cut only once this year has deflated some of the investment appetite," Hansen said.

A normalisation between London and New York futures also weighed on prices after copper's rally was propelled by a short squeeze on the U.S. Comex exchange.

LME aluminium CMAL3 rose 1.5% to $2,661 a ton and nickel CMNI3 gained 0.9% to $20,260, while tin CMSN3 shed 0.5% to $33,275, zinc CMZN3 dipped 0.1% at $3,060.50 and lead CMPB3 eased 0.4% to $2,297.50.

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Reporting by Eric Onstad; editing by David Evans and Ravi Prakash Kumar

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