* Dalian iron ore recovers from session lows
* Chances of iron ore falling back to $50/T rapidly declining -ANZ (Updates prices)
By Manolo Serapio Jr
MANILA, Aug 11 (Reuters) - Shanghai steel futures shook off early losses to finish higher on Thursday as expectations of tighter supply and a further demand pickup in top market China kept investors largely upbeat toward the commodity plagued for years by oversupply.
The strength in China's steel market has boosted raw material iron ore, with spot prices up more than 41 percent this year, following three years of decline.
Another round of mill closures in China may be imminent as Beijing keeps its vow to fight pollution and overcapacity, which should keep steel prices high, ANZ Bank said in a note.
Any repairs and reconstruction following heavy rain and flooding in north China and along the Yangtze River could also spur steel demand in the medium term, it said.
"This comes at a time when steel inventories and smelting margins are low. Thus, even a fleeting suggestion that the market may tighten results in a spike in steel prices," ANZ said.
The most-traded rebar, a construction steel product, on the Shanghai Futures Exchange SRBcv1 closed up 0.3 percent at 2,594 yuan ($391) a tonne, after falling as much as 2 percent. The contract hit 2,639 yuan on Wednesday, its highest since April 26.
With iron ore increasingly tracking the strength in steel, "the likelihood of iron ore prices falling back to $50/tonne in the short term is rapidly declining," ANZ said.
Iron ore for delivery to China's Tianjin port .IO62-CNI=SI has gained 27 percent from June to stand at $60.70 a tonne on Wednesday, according to The Steel Index. The spot benchmark touched a three-month high of $61.40 on Monday.
Since July 2015, ANZ said the correlation between the spot iron ore index and Chinese steel prices has increased from 11 percent to more than 63 percent, as improved profitability among mills boosted their appetite for iron ore.
It forecast China's steel consumption to drop by only 0.5 percent in 2016, against an initial prediction for a decline of 4.9 percent.
The most-active iron ore contract on the Dalian Commodity Exchange DCIOcv1 closed down 1.7 percent at 487 yuan a tonne, off a session low of 480 yuan. It touched a two-year high of 511 yuan on Tuesday.
($1 = 6.6401 Chinese yuan)