* Global dairy prices fall 5 percent * Whole milk powder down 7.3 percent * Fonterra's output increase weighs on prices (Adds details, background) By Leika Kihara WELLINGTON, July 4 (Reuters) - Global dairy prices fell at the biggest pace this year at a fortnightly auction held early on Wednesday, as strong supply muted what buyers were willing to pay for key products. The GDT Price Index dropped 5 percent, with an average selling price of $3,232 per tonne, in the auction held in the early hours of the morning, after slipping 1.2 percent at the previous sale. The results came after New Zealand milk producer Fonterra said on Tuesday its total milk production in the country increased 6 percent in May due to favourable autumn weather conditions. Fonterra's announcement "appears to have given the market the jitters," said Amy Castleton, analyst at AgriHQ. Whole milk powder, the most widely traded product, fell 7.3 percent to $2,905 per tonne. A total of 26,519 tonnes was sold at the latest auction, an increase of 22.6 percent from the previous one, the auction platform said on its website. The New Zealand dollar barely reacted to Wednesday's auction and hovered around $0.6750, as market participants focused on intensifying trade tensions between the United States and China. The auction results can affect the New Zealand dollar at times as the dairy sector generates more than 7 percent of the nation's gross domestic product. The New Zealand milk co-operative, which is owned by about 10,500 farmers, controls nearly a third of the world dairy trade. GDT Events is owned by New Zealand's Fonterra Co-operative Group Ltd , but operates independently from the dairy giant. U.S.-listed CRA International Inc is the trading manager for the Global Dairy Trade auction. The next auction is scheduled for July 17. A number of companies, including Dairy America and Murray Goulburn , use the platform to sell milk powder and other dairy products. (Reporting by Charlotte Greenfield Editing by James Dalgleish)