* Firm spot iron ore prices drive up futures
* Weak steel prices likely to cap upside potential for ore (Updates close prices)
SHANGHAI, Sept 1 (Reuters) - Dalian iron ore futures rose to a one-month high on Tuesday as spot prices of the steelmaking ingredient in the world's top consumer China stood firm amid low port inventories, but pared gains as weak steel demand weighed on the raw material.
The most-traded January iron ore on the Dalian Commodity Exchange DCIOcv1 hit a session high of 395.5 yuan ($62.11) a tonne, its highest since July 3. It narrowed gains to 0.78 percent to close at 388.5 yuan a tonne.
"Iron ore inventories both at ports and steel mills are relatively low, while shipment to China is expected to remain lean over the next two weeks, supporting spot prices," said Li Wenjing, an analyst with Industrial Futures in Shanghai.
The benchmark futures, after excluding the 17-percent tax and port fees, are about $8 a tonne lower than spot prices, Li added.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI climbed 0.36 percent to $55.7 a tonne on Monday, according to The Steel Index. The steelmaking commodity gained 5.3 percent in August but has lost 21.8 percent this year.
However, increased supply later in the year and the persistent weakness in steel prices amid a cooling economy are expected to curb the upside for the raw material.
"We are afraid prices are likely to fall and so we don't want to buy cargoes at the moment," said an iron ore trader in Shandong province.
The January rebar contract on the Shanghai Futures Exchange SRBcv1 closed almost unchanged at 1,963 yuan a tonne.
China's factory activity contracted at its fastest pace in three years in August, an official survey showed on Tuesday, reinforcing fears of a sharper slowdown in the world's second-largest economy despite a flurry of government support measures. ID:nL4N1123W5
Rebar and iron ore prices at 0702 GMT
Contract
Last
Change Pct Change
SHFE REBAR JAN6
1963
+3.00
+0.15
DALIAN IRON ORE DCE DCIO JAN6
388.5
+3.00
+0.78
SGX IRON ORE FUTURES SEP
54.72
+0.71
+1.31
THE STEEL INDEX 62 PCT INDEX
55.7
+0.20
+0.36
METAL BULLETIN INDEX
56.21
+0.17
+0.30
Dalian iron ore and Shanghai rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1 = 6.3682 Chinese yuan renminbi)