* Dalian iron ore erases morning losses to end slightly higher
* Singapore iron ore futures, Shanghai rebar cut losses (Recasts, updates prices)
By Manolo Serapio Jr
MANILA, March 9 (Reuters) - Iron ore futures in China shook off early weakness to finish slightly higher on Wednesday and Shanghai steel prices dropped as investors took a breather after a recent rally to multi-month highs that many think may not be sustained.
But Shanghai steel futures were off the session's lows and iron ore futures in Singapore also trimmed losses, keeping prices not far below recent peaks.
A surge in Chinese steel prices fueled a 20-percent spike in the price of spot iron ore on Monday, its biggest single-day jump on record.
"The rally was largely distorted away from fundamentals which have slightly improved compared with end-2015 but not enough to support the rapid hike in prices," said Zhao Chaoyue, analyst with Merchant Futures in Shenzhen.
"I understand that end-users including house appliance and auto producers have already restocked by the end of last year and the pace of buying is slowing at the moment while demand from the property sector hasn't picked up yet," Zhao said on steel usage in top consuming market China.
Rebar, a construction steel product, fell as far as 2,035 yuan ($312) a tonne on the Shanghai Futures Exchange SRBcv1 , but has recovered some lost ground to close at 2,104 yuan, down 2 percent.
On the Dalian Commodity Exchange, the most-traded May iron ore DCIOcv1 finished 0.6 percent higher at 424 yuan a tonne after dropping as much as 3.3 percent. May iron ore on the Singapore Exchange SZZFK6 was down 2.9 percent at $51.63 per tonne, after touching a session low of $49.75.
Investment bank ANZ said weakness in steel and iron ore futures "will only add to the market's reluctance to buy into the sustainability of iron ore prices above $60".
Iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI rose 1.1 percent to $63.30 per tonne on Tuesday, its strongest since June 15, according to data compiled by The Steel Index (TSI).
The 19.5 percent rally in the spot benchmark on Monday was its biggest gain since TSI began assessing prices in 2008.
Commonwealth Bank of Australia also thinks the sharp increase in iron ore above $60 is unsustainable, predicting prices would recoil to $40-$45 in the short term.
"We currently forecast China's crude steel output to contract again this year due to weaker domestic consumption, with steel exports unlikely to provide any real offset as countries put up trade barriers on steel," the bank said in a note.
Rebar and iron ore prices at 0732 GMT
Contract
Last
Change Pct Change SHFE REBAR MAY6
2104
-43.00
-2.00 DALIAN IRON ORE DCE DCIO MAY6
424
+2.50
+0.59 SGX IRON ORE FUTURES MAY
51.63
-1.54
-2.90 THE STEEL INDEX 62 PCT INDEX
63.3
+0.70
+1.12 METAL BULLETIN INDEX
63.63
-0.11
-0.17
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.5145 Chinese yuan)