* Shanghai rebar shakes off early losses to trade higher
* Chinese govt official says steel capacity cuts satisfactory (Updates prices)
By Manolo Serapio Jr
MANILA, Aug 19 (Reuters) - Spot iron ore prices were on course for a third weekly gain in four after scaling a 3-1/2-month high as firmer steel prices in top market China supported appetite for the raw material.
Higher iron ore futures in China on Friday suggest further increases for spot prices that have risen nearly 42 percent this year to be among the best performing commodities.
"The mills are enjoying good profits so they have incentive to buy raw material and try to produce as much steel as they can," said a Shanghai-based iron ore trader.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI slipped 0.5 percent to $60.80 a tonne on Thursday, according to The Steel Index.
But the spot benchmark was still up 1 percent for the week after hitting $61.80 on Tuesday, its loftiest since May 3, and could widen that gain amid stronger Chinese futures.
The most-active iron ore on the Dalian Commodity Exchange DCIOcv1 closed up 2.9 percent at 444.50 yuan ($67) a tonne.
China's efforts to tackle its excess capacity have helped strengthen steel prices as tighter environmental rules have led to closures and output curbs among domestic mills, including those in the top steel producing city of Tangshan.
The world's biggest steel producer has cut 47 percent so far of the 45 million tonnes in capacity it promised to remove this year.
The capacity reductions so far have been "satisfactory," according to a Chinese government official. most-traded rebar, a construction steel product, on the Shanghai Futures Exchange SRBcv1 climbed 1 percent to finish at 2,567 yuan a tonne, recovering from a session low of 2,497 yuan.
It hit a high of 2,649 yuan on Tuesday, its strongest since April 25. ($1 = 6.6427 Chinese yuan)