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Iron ore at 10-week high on China restocking, stimulus hopes

* Iron ore gains over 12 pct Monday-Tuesday

* Some Chinese buyers turning cautious after rapid rise

* Shanghai rebar hits 2-month high

By Manolo Serapio Jr

SINGAPORE, Oct 10 (Reuters) - Chinese steel futures rose to two-month highs on Wednesday, driven by hopes of more stimulus measures from Beijing to aid a slowing economy and backing further gains in iron ore prices that have leapt by more than 12 percent in the past two days.

Chinese steel producers, the world's biggest buyers of iron ore, returned to the spot market this week hungry for the raw material after last week's National Day holiday, helping push iron ore prices to their highest in 10 weeks.

But traders said some buyers are turning cautious given the rapid rise in prices, also abetted by fewer available spot cargoes, suggesting the price rally could soon hit a wall if steel demand does not take off.

The most briskly traded rebar contract for January delivery on the Shanghai Futures Exchange

peaked at 3,697 yuan ($590) per tonne in morning trading, its highest intraday level since Aug. 13.

Benchmark iron ore with 62 percent iron content

climbed 6.2 percent to $117.20 a tonne on Tuesday, its highest since Aug. 1, according to data provider Steel Index. Iron ore has now gained 12.5 percent over the past two days.

"The price recovery is due to expectations of more policy measures by China to boost consumption growth including steel as well as restocking," said Helen Lau, senior commodity analyst at UOB-Kay Hian in Hong Kong.

Apart from cuts in interest rates and banks' reserve requirement to boost liquidity, China approved 1 trillion yuan worth of infrastructure projects last month to lift a slowing economy.

China is also likely to start a new round of incentive policies to encourage vehicle purchases in rural areas, the official China Securities Journal reported on Wednesday.

CAUTION SETTING IN

Prices for spot iron ore cargoes have been rising since the Chinese returned to the market on Monday. Miner BHP Billiton

sold a cargo of 57.7-percent grade Australian Yandi iron ore fines at $108.85 a tonne on Tuesday, up from $106.65 on Monday, traders said.

Rio Tinto

sold two cargoes of 61 percent-grade Australian Pilbara blend fines at $119.01 per tonne, traders said, exceeding the price for the higher 62-percent grade.

Vale

is selling on Wednesday a 90,000-tonne cargo of 63.2-percent grade iron ore after selling a shipment with the same specifications at 121.67 per tonne on Tuesday, said a Singapore-based trader. Rio Tinto is holding a tender for 75,000 tonnes of 64.5-percent grade material.

"Steel mills were quite active in restocking over the past two days, but the sentiment has been waning a little bit since yesterday and traders are reluctant to book forward cargoes at the current high levels," said a Shanghai-based iron ore trader.

"We planned to buy some, but we are still cautious."

Lau at UOB-Kay Hian said the current iron ore rally is mostly sentiment-driven and could stall if China's steel demand disappoints again.

"It has to be supported by a real recovery in steel demand to be sustainable," she said.

Shanghai rebar futures and iron ore indexes at 0440 GMT

Contract Last Change Pct Change SHFE REBAR JAN3 3692 +25.00 +0.68 PLATTS 62 PCT INDEX 120.25 +7.75 +6.89 THE STEEL INDEX 62 PCT INDEX 117.2 +6.80 +6.16 METAL BULLETIN INDEX 119.32 +3.90 +3.38 Rebar in yuan/tonne

Index in dollars/tonne, show close for the previous trading day

($1 = 6.2878 Chinese yuan)

(Reporting by Manolo Serapio Jr.; Editing by Himani Sarkar)

((manolo.serapio@thomsonreuters.com)(+65 6870 3884)(Reuters Messaging: manolo.serapio.reuters.com@reuters.net))

Keywords: MARKETS IRONORE/