* US imposes steel import quota of 70 pct of 3-yr average
* US exempts tariffs on South Korean steel under quota
* South Korea is 3rd largest steel exporter to US
* S.Korean steelmaking firms rally on deal hopes (Recasts lede, adds quotes)
SEOUL, March 26 (Reuters) - The United States and South Korea agreed to revise a trade pact sharply criticized by U.S. President Donald Trump, Seoul said on Monday, with U.S. automakers winning improved market access and Korean steelmakers hit with quotas but avoiding hefty tariffs.
The planned changes in the U.S.-Korea Free Trade Agreement (KORUS) come as Trump seeks to strike a balance between his domestic agenda and the need to work closely with Seoul to try to contain a nuclear-armed North Korea.
In April, Trump told Reuters he would either renegotiate or terminate what he called a "horrible" trade deal that has doubled the U.S. goods trade deficit with South Korea since 2012.
The agreement means South Korea will be forced to cut its steel exports to the U.S. by 30 percent of past three years' average, in exchange for becoming the first U.S. ally to receive an indefinite exemption on steel tariffs imposed by Trump.
Trump's action on steel and aluminum, along with plans to slap tariffs on up to $60 billion in Chinese goods had fueled concerns of a damaging global trade war.
"We had heated discussions," South Korean Trade Minister Kim Hyun-chong said at a media briefing in Seoul. "The latest agreement removed two uncertainties," he said, referring to steel tariff exemptions and KORUS renegotiation.
Last week, Trump temporarily excluded six trade partners, including Canada and Mexico, Australia and the European Union from higher U.S. import duties on steel and aluminum which came into effect on Friday.
The import duties, of 25 percent on steel and 10 percent on aluminum, were mainly aimed at curbing imports from China.
South Korea has received a quota of about 2.68 million tonnes of steel exports, or 70 percent of the annual average Korean steel exports to the United States between 2015-2017, which will be exempt from the new tariffs, the ministry said in a statement.
South Korea is not allowed to export steel products exceeding that quota to the U.S. market, a ministry official said.
"This leaves a bad precedent of exchanging steel tariffs - which is a breach of international trade law - for a legitimate free trade agreement, in negotiations," said Wonmog Choi, professor of law at Ewha Womans University.
TRADE WAR FEARS
South Korea is the third-largest steel exporter to the United States and the world's top importer of Chinese steel, leading to concerns it was a conduit for China's excess capacity.
Trump was elected in 2016 after promising to punish what he saw as unfair trade practices by other countries, particularly China.
Alarm over a possible trade war between the world's two largest economies has chilled financial markets as investors foresee dire consequences should trade barriers go up.
While Trump was adamant the KORUS deal needed renegotiating, the trade spat risked undermining relations between Seoul and Washington at a crucial time.
"We are at a time when U.S.-South Korea cooperation is needed more than ever ahead of the inter-Korean summit and the summit between North Korea and the United States," said a senior official at South Korea's presidential Blue House, who was not authorized to speak to media.
South Korean officials said that while the deal agreed was the best they could hope for, further pressure on trade was likely under Trump's presidency.
"If President Trump becomes a two-term president ... I believe there will be continuous (trade) risks during that time," Trade Minister Kim said.
Shares in South Korean steelmakers rallied on Monday, with Dongbu Steel leading gains as tariff exemptions were confirmed.
South Korea's steel association said in a statement it was a "relief" that South Korea has been excluded from U.S. steel tariffs, but regrettable it was unable to secure higher quotas.
As part of the KORUS revision, the countries agreed to extend U.S. tariffs on Korean pickup trucks by 20 years until 2041.
No South Korean automakers currently export pickup trucks to the United States, but Hyundai Motor said last year it planned to launch a model there to catch up with a shift away from sedans.
Under KORUS revisions, U.S. automakers will be able to bring into South Korea 50,000 vehicles per automaker per year that meet U.S. safety standards, not necessarily Korean standards, up from 25,000 vehicles previously.
Kim said no automakers previously exceeded the 25,000-vehicle threshold. Ford Motor Co and General Motors each shipped fewer than 10,000 vehicles last year.
"I don't see a high chance of automakers expanding U.S. imports," he said.
Kim Jong-hoon, a former chief negotiator for the KORUS FTA, said South Korea had fared relatively well in negotiations.
"South Korea gave concessions in autos in return for steel tariff exemptions," he told Reuters. "This is not a free trade, but a managed trade." (Reporting by Joyce Lee and Hyunjoo Jin; Additional reporting by Christine Kim Editing by Lincoln Feast)