* ASX 200 dips 0.5 percent in seventh session of losses
* 68 shares higher, 118 shares lower, 13 shares unchanged
* Stocks with strong offshore exposure gain on weaker $A (Adds analysis, quotes, stocks on the move)
By Thuy Ong and Gyles Beckford
SYDNEY/WELLINGTON, Sept 18 (Reuters) - Australian shares reversed early gains to shed 0.5 percent on Thursday, extending losses to a seventh session with further weakness in iron ore prices hurting the resource sector.
Stocks with exposure to the United States found support on signs of strength in the world's largest economy and as the Aussie dollar fell near six-month lows, benefitting exporters.
Elsewhere, iron ore retreated further after a spike higher at the start of the week, reflecting continued pressure from a well-supplied market. Global iron ore miners BHP Billiton Ltd and Rio Tinto Ltd fell 1.2 percent and 0.9 percent, respectively.
The S&P/ASX 200 index tumbled 28.4 points to 5,378.9 by 0155 GMT, trading at 11-week lows. The benchmark fell 0.7 percent on Wednesday.
The banking sector reversed its strong start to trade lower. Top lender Commonwealth Bank of Australia declined 0.7 percent and Australia's oldest bank Westpac Banking Corp lost 0.4 percent.
"Overseas investors do not benefit from franking credits and lose with a falling $A, hence they sell on mass as we are currently witnessing," said Alexander Aguilan, investment adviser at Market Matters in a note to clients addressing the fall among banking stocks.
Stocks with U.S. exposure gained ground as the Australian dollar traded at $0.8963, near six-month lows in early Asia-Pacific trade.
Pallet-maker Brambles Ltd jumped 1.7 percent, while blood products maker and Treasury Wine Estates Ltd climbed 1.3 percent.
Companies with large offshore earnings benefit from a weaker Australian dollar, with their bottom lines boosted as funds are repatriated.
Arrium Ltd dived some 26 percent to all-time lows of A$0.42 after raising A$465 million from instituations at a steep 26 percent discount to its last trade.
Macmahon Holdings Ltd soared 9.1 percent after it said the company and two of its Mongolian operating subsidiaries had entered into a three-week standstill agreement with state-owned mining company Erdenes Tavan Tolgoi.
Wesfarmers Ltd lost 1.3 percent to 6-week lows of A$42.54 after the company said the Australian Competition and Consumer Commission would not oppose the acquistion of three IGA supermarkets by the company.
Luxury retailer Oroton Group Ltd bounced 13.8 percent after its net profit after income tax expense jumped 15.6 percent to A$8.3 million and has declared a fully franked final dividend of A$0.08 per ordinary share.
New Zealand stocks were firmer after falling in each of the past four consecutive sessions, with broad based buying support for the leading stocks. The benchmark NZX-50 index was up 0.3 percent at 5,156.43.
The top stock Fletcher Building eased 0.8 percent to a seven-and-a-half month low of NZ$8.70 before rising a couple of cents, but most of the other top 10 companies were modestly higher.
Local investors are looking to Saturday's general election, with the latest polls showing the governing centre-right National Party well ahead but likely to need the support of minor parties to govern.
The opposition Labour and Green parties have a proposal to heavily regulate the New Zealand power sector, which has weighed on stocks such as Contact Energy and Mighty River Power . (Reporting by Thuy Ong; Editing by Jacqueline Wong)