* Iron ore hits downward limit on slow purchases
* BHP sticks to iron ore expansion plan (Updates close prices)
SHANGHAI, July 22 (Reuters) - Chinese steel tumbled and iron ore futures hit a floor limit because of shrinking demand in the world's top consumer of the two commodities.
The most active January iron ore contract on the Dalian Commodity Exchange DCIOcv1 touched a downside limit of 4 percent to 349.5 yuan($56.29) a tonne, the same level it closed.
The most traded rebar futures contract on the Shanghai Futures Exchange SRBcv1 plunged 3.3 percent to 2,031 yuan a tonne by close.
The softer demand has offset expectations that more steel mills will cut production to ease oversupply and stem losses, which pushed up steel and iron ore prices briefly earlier in the month.
China's industrial sector still faces significant problems and "arduous efforts" are needed to stabilise the economy, the industry ministry said on Wednesday. ID:nB9N0ZK02C
Steel strip prices in the country's top steel-producing region of Tangshan, a barometer for the wider market, fell again by 40 yuan on Wednesday to 1,960 yuan a tonne, traders said.
Contracting steel production and rising supplies of iron ore will further hit demand for the steelmaking ingredient.
"Iron ore was also lower, with supply-side concerns rising after BHP announced moves to further debottleneck Port Hedland," ANZ said in a research note.
BHP Billiton BHP.AX BLT.L beat its own production guidance for iron ore in fiscal 2015 and said on Wednesday it was on track for additional growth in the current year following major expansion work. ID:nL3N10163V
Output at its Western Australia iron ore mines increased by 13 percent to a record 254 million tonnes in the year ended June 30 versus its forecast of 250 million tonnes.
On Tuesday it said it would spend $240 million to upgrade marine iron ore facilities, including a new tug harbour at Port Hedland. ID:nL3N10124O
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI extended recent gains and was up 0.4 percent at $52.10 a tonne on Tuesday, its highest level since July 3, according to Steel Index.
Rebar and iron ore prices at 0700 GMT
Contract
Last
Change Pct Change SHFE REBAR JAN6
2031
-70.00
-3.33 DALIAN IRON ORE DCE DCIO JAN6
349.5
-14.50
-3.98 SGX IRON ORE FUTURES SEP
46.7
-1.80
-3.71 THE STEEL INDEX 62 PCT INDEX
52.1
+0.20
+0.39 METAL BULLETIN INDEX
52.1
-0.29
-0.55
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.2090 Chinese yuan)