(Corrects April imports in paragraph 5 to 28.69 mln tonnes, not 26.45 million tonnes)
* May coal imports up 5.6 pct on year, down 3.9 pct on month
* Narrowing price arbitrage for imports curbs import appetite
* Traders stay on sidelines on policy uncertainty
SHANGHAI, June 18 China's coal imports, including lignite, fell 3.9 percent in May from a month ago as worries over import policies, high overseas prices and weak local demand curbed buyers' appetites, data from the China Coal Transport and Distribution Association showed.
China is the top coal consumer and traders there said weak domestic demand and uncertainty over whether Beijing would limit imports led buyers to adopt a wary attitude. Spot demand has been tepid since April as falling domestic prices have narrowed the profit margins of imported material.
China is considering a ban on low-quality thermal coal imports to aid struggling domestic coal miners. Such a move would largely hit Indonesian miners, whose sales to China have jumped after import taxes on lignite were removed in 2012.
Any ban on imports of low-quality coal would likely most affect lignite, a type of coal with a low heating value.
Coal arrivals in May stood at 27.57 million tonnes, down from 28.69 million tonnes imported in April, according to the data published late on Monday.
The May imports climbed 5.6 percent from a year ago, bringing total imports in the first five months to 136.17 million tonnes, up 20.9 percent from the same period last year.
The association's data did not give a breakdown on the types of coal imported. The customs agency will release detailed import and export data on June 21.
"Strong demand from India has led Indonesian miners to keep coal prices high, causing the price difference between imports and domestic coal to narrow, in turn cutting margins for traders," the association said in its report.
Chinese coal prices have been steadily falling since the start of the year and are hovering near a four-year low.
Spot prices for coal with a heating value of 5,500 kcal/kg steadied at 610 yuan ($99.59) a tonne last week, according to the benchmark Bohai-Bay Rim index. Sellers were offering a 10-15 yuan discount to the index to spur sales, traders said.
Australian coal with a heating value of 6,000 kcal/kg closed at $83.30 per tonne on Friday, according to the globalCOAL index.
Freight rates from Newcastle to South China for panamax vessels are hovering at between $12-$13 per tonne. ($1 = 6.1250 Chinese yuan) (Reporting by Fayen Wong; Editing by Tom Hogue)