* Iron ore demand from China mills rebounding strongly -ANZ
* Spot iron ore rallied nearly 5 pct to 3-wk high (Updates prices)
By Manolo Serapio Jr
MANILA, April 12 (Reuters) - Dalian iron ore futures surged 6 percent to hit their upside limit on Tuesday as steel prices extended gains to touch a fresh 10-month high, backed by tighter supply as seasonal demand strengthens in top consumer China.
The rally in steel prices has been boosting margins among Chinese producers, pushing them to buy more raw material. Spot iron ore climbed nearly 5 percent to a three-week peak on Monday and could similarly stretch gains amid firmer ferrous futures.
"Iron ore demand from steel mills is rebounding strongly as profitability improves dramatically," analysts at ANZ Bank said in a note.
The most-traded September iron ore on the Dalian Commodity Exchange DCIOcv1 closed up 6 percent at the exchange-set ceiling of 409.50 yuan ($63.35) a tonne, the highest since March 24.
The rally followed gains in steel futures as rebar, a construction steel product, jumped 3.6 percent to finish at the session-high of 2,344 yuan a tonne on the Shanghai Futures Exchange SRBcv1 , its strongest since June 12, 2015. That followed a 4.8 percent gain on Monday.
Brisk construction activity through May is lifting demand for steel in China, helping mills recover from losses earlier in the year.
Major Chinese steel mills reported losses of 11.4 billion yuan for the first two months of the year, according to the China Iron and Steel Association. are also boosting output before mandated output cuts ahead of a horticultural show in China's key Tangshan area and taking advantage of rising steel prices, lifting demand for iron ore, Commonwealth Bank of Australia said. Tangshan mills are required to cut emissions by at least 50 percent on certain days during the exposition, due to run from April 29 to Oct. 16.
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI jumped 4.9 percent to $55.90 a tonne on Monday, the highest since March 23, according to price assessor The Steel Index (TSI).
While iron ore market activity was relatively limited, bids for available cargoes rose due to firmer steel prices, TSI said, adding that prices for iron ore stocks at Chinese ports increased 15 yuan per tonne.
The spot benchmark has recovered 8 percent from a March 15 trough of $51.70 and could extend gains along with futures. ($1 = 6.4639 Chinese yuan)