(Updates with closing prices)
* LME/ShFE arb: http://bit.ly/2wZSAEz
LONDON, Nov 7 (Reuters) - Nickel fell sharply on Tuesday as a stronger dollar encouraged investors to take profits after prices rose almost 10 percent to two-year highs last week on growing expectations of demand from manufacturers of batteries used to power electric vehicles.
Copper, aluminium and zinc also fell but remained near multi-year highs on strong global growth and supply worries from a crackdown on polluting smelters in China.
"The market has outdone itself to an extent so we are seeing a price correction and profit-taking," said ING analyst Warren Patterson.
Demand for nickel for batteries is unlikely to appear in the near term, he said. "It's a 5 to 10-year story, not something that's hitting the market now. Inventory levels are still very comfortable. The market has got a bit ahead of itself and I would expect to see some downward correction."
NICKEL: Benchmark nickel on the London Metal Exchange closed 2.1 percent down at $12,655 a tonne, having last week reached $13,030, its highest since June 2015.
POSITIONING: Investors continue to bet on rising prices, with money managers' net long position in LME nickel rising to its highest since early March, <LME-NI-MNET>
SUPPLY: Indonesia's mining ministry issued export quota recommendations, typically valid for one year, of 20.4 million tonnes for nickel ore and 14.7 million tonnes for bauxite.
"This is likely to be reflected in higher exports over the next few months," Commerzbank analysts said. "Concerns about an insufficiently supplied (nickel) market ... are being replaced by reports of higher supply."
STOCKS: Nickel inventories in LME-registered warehouses have risen gradually from a low of about 360,000 tonnes late last year to 382,356 tonnes on Tuesday, pointing to a well-supplied market. <MNISTX-TOTAL>
DOLLAR: The dollar strengthened to near its highest since July, making metals more expensive for holders of other currencies and potentially reducing demand.
GERMAN INDUSTRY: German industrial production fell in September after surging a month earlier, but output grew by 0.8 percent in the third quarter and is expected to increase further in the months ahead.
CHINA COBALT: China is depending too much on the Democratic Republic of Congo for cobalt, a component in electric vehicle batteries, and should take steps to ensure security of supply, delegates said at an industry conference.
PRICES: LME copper closed 2.1 percent down at $6,826 a tonne, aluminium ended 1.8 percent lower at $2,132, zinc fell 2 percent to $3,166, lead lost 0.6 percent to $2,496 and tin closed 0.7 percent up at $19,580.
(Additional reporting by James Regan; Editing by John Stonestreet and David Goodman)