* Dalian ore rallied by 6 pct upside limit in past 2 sessions
* Spot iron ore up over 35 pct this year, top performing commodity (Updates prices)
By Manolo Serapio Jr
MANILA, March 22 (Reuters) - Shanghai steel futures rose for a fourth session in a row on Tuesday, backed by improved seasonal demand in top market China that should support appetite for raw material iron ore.
Spot iron ore has been climbing back towards $60 a tonne over the past week, recovering after a steep 18 percent drop from a nine-month peak hit earlier in March. The steelmaking raw material has risen more than 35 percent this year, the biggest gainer among commodities.
But Dalian iron ore futures retreated on Tuesday after surging around 6 percent and hitting their upside limit in the past two sessions.
On the Shanghai Futures Exchange, construction-used rebar for October delivery SRBcv1 closed up 0.6 percent at 2,158 yuan ($332.48) a tonne. The contract touched a nearly nine-month high of 2,210 yuan on Monday.
"I think this round of price rebound is supported by improving downstream demand," said Richard Lu, analyst at consultancy CRU in Beijing.
Warmer weather typically lifts construction activity in China from March through May, spurring steel demand. Spot rebar in Shanghai stands at around 2,350 yuan a tonne, up around 300 yuan from end-February, said Lu.
"At these price levels some mills are now having positive margins and some of them have restarted or will increase production," he said.
Inventory of steel products held by Chinese traders dropped to 11.71 million tonnes on March 18, from 12.09 million tonnes in the previous week, according to industry consultancy Mysteel.
Lu said the slow drawdown in steel inventory points to a modest pickup in demand so far.
September iron ore on the Dalian Commodity Exchange DCIOcv1 slipped 1.7 percent to end at 416.50 yuan a tonne. Iron ore futures on the Singapore Exchange 0#SZZF: also weakened.
On Monday, iron ore for immediate delivery to China's Tianjin port .IO62-CNI=SI jumped 3 percent to $58 a tonne, according to The Steel Index, as strong futures helped lift bids for physical cargoes.
The spot benchmark soared by a record 19.5 percent on March 7, only to surrender nearly all those gains in succeeding sessions. But the steelmaking commodity began rising again on March 16, sustaining its run-up through Monday.
Rebar and iron ore prices at 0708 GMT
Contract
Last
Change Pct Change SHFE REBAR OCT6
2158
+13.00
+0.61 DALIAN IRON ORE DCE DCIO SEP6
416.5
-7.00
-1.65 SGX IRON ORE FUTURES APR
55
-0.43
-0.78 THE STEEL INDEX 62 PCT INDEX
58
+1.70
+3.02 METAL BULLETIN INDEX
58.82
+1.32
+2.30
Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day ($1 = 6.4906 Chinese yuan)