* Tougher environmental war to hit steel production
* Spot prices recover, sentiment improves
* Iron ore tracks rebar, but demand seen to weaken
SHANGHAI, July 27 (Reuters) - Chinese rebar futures extended gains to hit a one-week high on Monday as spot prices edged up on expectations that tougher environmental measures will force more mills to cut production in the world's top producer.
The most traded January rebar futures on the Shanghai Futures Exchange SRBcv1 rose to a session high of 2,099 yuan ($338.03) a tonne, the highest since July 21. It traded 1.5 percent higher at 2,079 yuan by midday break.
More environmental measures are expected to be rolled out in northern regions in coming months as Beijing aims to launch an army parade for a celebration of the 70th anniversary of the victory in World War II in September, industry sources said.
"Market sentiment is improving as supply is expected to drop as a result of environmental measures, and now we see signs of prices starting to stabilize," said Yu Yang, an analyst with Shenyin & Wanguo Futures in Shanghai.
Some steel mills in northern cities surrounding the capital of Beijing have been ordered to cut production by 30-50 percent in coming months, traders said.
Deep losses as a result of slower steel consumption growth, chronic overcapacity and tougher environmental rules are also expected to force more inefficient mills to shut down.
Iron ore futures tracked gains in rebar on Monday, but the upside was capped as lower rates of steel production hit demand for the raw material.
The most active January iron ore futures contract on the Dalian Commodity Exchange DCIOcv1 rose 1 percent to 353 yuan by the midday break, after falling for three days in a row.
"Fundamentals of iron ore are currently weaker than steel as top miners are pushing to maximize output but appetite from China is softening," Yu said.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI rose 0.2 percent to $50.70 a tonne on Friday, according to the Steel Index. It edged up 1.4 percent last week. Rebar and iron ore prices at 0330 GMT
Contract
Last
Change Pct Change SHFE REBAR JAN6
2079
+31.00
+1.51 DALIAN IRON ORE DCE DCIO JAN6
353
+3.50
+1.00 SGX IRON ORE FUTURES SEP
48.26
+1.26
+2.68 THE STEEL INDEX 62 PCT INDEX
50.7
+0.10
+0.20 METAL BULLETIN INDEX
51.42
-0.30
-0.58
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.2095 Chinese yuan renminbi)