* 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 totwo-month highs on Wednesday, driven by hopes of more stimulusmeasures from Beijing to aid a slowing economy and backingfurther gains in iron ore prices that have leapt by more than 12percent in the past two days.
Chinese steel producers, the world's biggest buyers of ironore, returned to the spot market this week hungry for the rawmaterial after last week's National Day holiday, helping pushiron ore prices to their highest in 10 weeks.
But traders said some buyers are turning cautious given therapid rise in prices, also abetted by fewer available spotcargoes, suggesting the price rally could soon hit a wall ifsteel demand does not take off.
The most briskly traded rebar contract for January deliveryon the Shanghai Futures Exchange
peaked at 3,697 yuan($590) per tonne in morning trading, its highest intraday levelsince Aug. 13.
Benchmark iron ore with 62 percent iron content
climbed 6.2 percent to $117.20 a tonne onTuesday, its highest since Aug. 1, according to data providerSteel Index. Iron ore has now gained 12.5 percent over thepast two days.
"The price recovery is due to expectations of more policymeasures by China to boost consumption growth including steel aswell as restocking," said Helen Lau, senior commodity analyst atUOB-Kay Hian in Hong Kong.
Apart from cuts in interest rates and banks' reserverequirement to boost liquidity, China approved 1 trillion yuanworth of infrastructure projects last month to lift a slowingeconomy.
China is also likely to start a new round of incentivepolicies to encourage vehicle purchases in rural areas, theofficial China Securities Journal reported on Wednesday.
CAUTION SETTING IN
Prices for spot iron ore cargoes have been rising since theChinese returned to the market on Monday. Miner BHP Billiton
sold a cargo of 57.7-percent grade AustralianYandi iron ore fines at $108.85 a tonne on Tuesday, up from$106.65 on Monday, traders said.
sold two cargoes of 61percent-grade Australian Pilbara blend fines at $119.01 pertonne, traders said, exceeding the price for the higher62-percent grade.
is selling on Wednesday a 90,000-tonne cargoof 63.2-percent grade iron ore after selling a shipment with thesame specifications at 121.67 per tonne on Tuesday, said aSingapore-based trader. Rio Tinto is holding a tender for 75,000tonnes of 64.5-percent grade material.
"Steel mills were quite active in restocking over the pasttwo days, but the sentiment has been waning a little bit sinceyesterday and traders are reluctant to book forward cargoes atthe 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 ismostly sentiment-driven and could stall if China's steel demanddisappoints again.
"It has to be supported by a real recovery in steel demandto be sustainable," she said.
Shanghai rebar futures and iron ore indexes at 0440 GMT
Contract Last Change Pct ChangeSHFE REBAR JAN3 3692 +25.00 +0.68PLATTS 62 PCT INDEX 120.25 +7.75 +6.89THE STEEL INDEX 62 PCT INDEX 117.2 +6.80 +6.16METAL BULLETIN INDEX 119.32 +3.90 +3.38Rebar 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)
Keywords: MARKETS IRONORE/