* Australia's Fortescue calls on rivals to cap iron ore output
* Fortescue founder says ore price will rise in response
* Australia's competition regulator says holds "grave concerns" (Adds Fortescue ceo comments, updates shares)
By James Regan
SYDNEY, March 25 (Reuters) - Australia's Fortescue Metals Group called on iron ore miners to cap production in the hope of reversing a dramatic fall in prices, triggering a probe by Australia's competition regulator.
Fortescue founder and chairman Andrew Forrest told a gathering in Shanghai late Tuesday he was happy to challenge rivals to "cap our production right here and start acting like grown-ups."
The comments come as a glut of ore, along with slower Chinese demand growth, has slashed prices, hampering efforts by the world's fourth-largest iron ore miner to refinance $2.5 billion in debt and sending its shares to six-year lows.
Australian competitors BHP Billiton and Rio Tinto declined to comment, but have consistently outlined a strategy of ramping up production
The Australian Competition and Consumer Commission (ACCC) said on Wednesday it would investigate Forrest's remarks. Australia has penalties of up to 10 years in jail for individuals involved in cartel behaviour and heavy financial penalities for companies.
"In general terms, any attempt by Australian businesses to encourage competitors to restrict outputs is a matter of grave concern to the ACCC," commission chairman Rod Sims said in a statement.
Fortescue Chief Executive Nev Power said Forrest had wanted to highlight that a "last man standing fight for market share" would hurt shareholders of all companies and was not in the long term interests of Australia or iron ore buyers.
"Modern economics sees this strategy of depressing price to concentrate market share as too expensive to be considered rational - it destroys value in a similar way to predatory pricing - and is not in the long run interests of Australia or our customers," he said.
Forrest said at the business gathering that he was "absolutely happy to cap my production right now" at 180 million tonnes. This is 20 million to 25 million tonnes above the miner's forecast output this year.
If Rio Tinto, BHP and Brazil's Vale also cap their production "we'll find the iron ore price will go straight back up to $70, $80, $90 (a tonne)," Forrest said.
Iron ore prices have halved over the past year to stand at $55.60 .IO62-CNI=SI.
Fortescue, Vale, Rio Tinto and BHP added 234 million tonnes of iron ore in the past two years - five times yearly U.S. consumption - and intend to inject another 196 million tonnes by 2020.
Rio Tinto Chief Executive Sam Walsh has said iron ore mining has become a "survival of the fittest" business, where only the largest producers were likely to prosper.
BHP chief Executive Andrew Mackenzie wrote in The Australian newspaper in February that he saw no benefit in curtailing output, which would only "reduce Australian exports, and Australia's share of the iron ore market".
Fortescue was producing at a rate of 164 million tonnes a year in the first half of fiscal 2015, slightly ahead of its own guidance of 155-160 million tonnes, a company spokesman said.
Morgan Stanley on Tuesday cut its rating on Fortescue to underweight from equal weight, citing reductions in the bank's iron ore price forecasts. It has a A$1.65 a share price target on the stock.
Fortescue's shares closed up 1.5 percent at A$2.04 as miners gained from an overnight rise in iron ore prices.
Additional reporting by Sonali Paul in MELBOURNE; Editing by Richard Pullin