* Wheat drops 4.2 percent on outlook for Kansas rain
* Corn falls on hopes for planting in western Midwest
* Soy decline limited by firm crude oil market
* Coming Up: Weekly USDA export sales report on Thursday (Recasts, updates prices, market activity to close)
By Mark Weinraub
CHICAGO, April 27 (Reuters) - U.S. wheat and corn futures fell sharply on Wednesday as updated forecasts for improved weather in key U.S. growing areas prompted investors to reduce premiums in those markets.
Calls for rain needed to help the developing hard red winter wheat crop in Kansas pushed wheat futures down 4.2 percent, their biggest drop in two weeks.
Corn futures fell on expectations for dry weather west of the Mississippi River that will allow farmers there to renew delayed planting activities.
"Both markets are trading at very high levels and it looks to me like we may need to see some consolidation before we can make the next move higher from here," said Doug Bergman, grain broker with MF. "Obviously, we have some problems with weather here in the United States but one small change in one area can make a big difference."
Soybean futures also closed lower, but the decline was limited by support from a firm crude oil market and a weakening dollar.
CBOT May soft red winter wheat settled down 34-1/4 cents at $7.77 a bushel. Wheat prices closed below key support at their 100-day moving average.
CBOT May corn was down 14 cents at $7.52-1/4 a bushel. CBOT May soybeans were 4-3/4 cents lower at $13.78 a bushel.
WHEAT DECLINE STARTED OVERNIGHT
Wheat prices have dropped 6.1 percent in two days.
"The perception of weather certainly has improved a bit for wheat," said Dan Kuechenmeister, manager of the commodities department at RBC Dain Rauscher. "There is a little bit better chance of rain, maybe some cooler temperatures, which is certainly welcome news."
Some rainstorms hit southern areas of Kansas on Tuesday night, and there were calls for more precipitation in drought-stressed areas of the U.S. Plains during the next few days, said Mike Palmerino, forecaster for Telvent DTN.
"It is not going to cure the problem ... but it will certainly help," Palmerino said. "There is reason to be a little more optimistic here that we may see a little improvement in the overall crop conditions."
European benchmark wheat futures in Paris fell as the prospect of rain in key wheat producers Germany and France helped ease drought worries while a new rise in the euro made European grains less attractive on world markets.
Canada's farmers intend to plant more canola, all-wheat and oats than the trade expected, according to Statistics Canada's first report on 2011 crop plans, but wet farms have left seeding plans in doubt. (Reporting by Mark Weinraub; Editing by Lisa Shumaker, Sofina Mirza-Reid and David Gregorio)