UPDATE 2-BHP digging deeper for more ore to feed China steel mills

* BHP December quarter iron ore output up 3 pct

* Some analysts were expecting slightly bigger gain

* Softer iron ore market looms

* BHP sees FY 2013 output at 183 million tonnes

SYDNEY, Jan 23 (Reuters) - BHP Billiton , the world's biggest mining company, boosted its iron ore output of the raw material to Chinese steelmakers despite signs of a softening market. The increase was slightly below analysts' forecasts, but the shortfall is unlikely to dent the ever-rising tonnages of Australian iron ore bound for the world's top buyer China, where demand growth is expected to slow this year. The risk, say analysts, is that miners may flood the notoriously fickle market for seaborne-traded iron ore, where prices can rise or fall by as much as 50 percent in a matter of months. China's iron ore imports are expected to grow only by 25-50 million tonnes this year, according to the China Metallurgical Mining Enterprises Association, a slower pace than previous years. Moreover, China's own mines already supply about half the mills' needs, with some 200 million tonnes of additional capacity capable of being reactivated on short notice. "There's enough demand in China as long as the Chinese don't restart too many of their own mines, which they will do if they believe (iron ore) prices need to come down," said David Lennox, a mining analyst for Fat Prophets in Sydney. BHP's iron ore production rose to 42.2 million tonnes in the three months ended Dec. 31 from 41.1 million in the same period a year ago, it said, highlighting record tonnages from its Australian mines. BHP plans to boost output an overall 5 percent, or 9 million tonnes to 183 million tonnes in the year to June 2013. At the same time Rio Tinto and Fortescue Metals Group will add nearly 40 million tonnes each this year.

IRON ORE TUMBLES Iron ore prices have tumbled 8 percent since a short-lived restocking drive by Chinese steel mills lifted iron ore to $158.50 a tonne on Jan. 8. Iron ore sold for as little as $80 a tonne as recently as September. Fortesecue Metals Group is due to release a production report on Thursday which should show Fortescue's iron ore shipments up 26 percent from a year ago at 18.6 million tonnes. At this rate Fortescue is on track to reach its next annual target rate of 115 million tonnes this quarter as it strives to take annual production to 155 million tonnes by December 2013. BHP's quarterly performance swept its half-year output to 81.96 million tonnes of iron ore at its Western Australian operations, up 2 percent on the same period the previous year. Despite worries about slowing expansion that at one point last year sent iron ore prices below $100 a tonne, imports by China surged by 8.4 percent last year to a record 743.6 million tonnes, encouraging suppliers to lift output. China's economic outlook has improved markedly since the government announced a slew of approvals for railway investments, highway projects and other infrastructure projects in September worth an estimated $160 billion. Still, the increase in global supply is expected to outpace a recovery in demand from China and elsewhere, meaning prices this year may struggle to regain their January peaks, a Reuters poll this week showed. "High levels of iron ore investment globally, and in Australia specifically, will drive oversupply as demand from steel manufacturers is unable to keep pace," Barclays warned in a note to clients this month.