* Indian 63.5 pct ore offers fall $2 per tonne-Mysteel
* Prices may extend drop unless Chinese buyers return
* Q2 iron ore contract price seen up 20 pct
By Ruby Lian and Manolo Serapio Jr.
SHANGHAI/SINGAPORE, Feb 28 (Reuters) - Spot iron ore prices extended losses on Monday after slumping 5 percent from mid-February last week, with Chinese steelmakers expecting prices to fall further on demand uncertainties.
But the recent surge in prices to record highs is expected to lift second-quarter contract prices for the steelmaking ingredient up around 20 percent to an all-time high.
Platts' widely-used 62 percent iron ore index IODBZ00-PLT has averaged $179.2 per tonne, including freight, from Dec. 1 to Feb. 25 -- the basis for the second-quarter contract -- up 20 percent from $149.2 in the September-November period, on which the first-quarter contract was based on, according to Reuters calculations.
The contract price would be the highest since the industry shifted to a quarterly pricing system in April 2010, largely in line with a Reuters poll of analysts earlier this month.
Vale, the world's largest iron ore miner which has seen its profits soar since the decades-old annual pricing scheme was ditched last year, also said it expects second-quarter prices to jump by around 20 percent.
The rally that began at the start of 2011 faltered last week as spot prices fell 5 percent from February highs with demand from top buyer China slowing.
Indian ore with 63.5 percent iron content was quoted in China at $189-$191 per tonne on Monday, including freight, down from $191-193 on Friday, said Chinese consultancy Mysteel.
"We can't tell how the market will go so far. Demand is weak and steel mills still don't want to buy unless steel prices rise strongly," said an iron ore trader in Shanghai.
SHANGHAI REBAR NEAR 2-MONTH LOWS
The most active steel rebar contract for October delivery on the Shanghai Futures Exchange rose half a percent on Monday after falling more than 2 percent to near two-month lows last week on worries about weak steel demand from end-users.
The decline in Shanghai steel futures helped trigger a correction in iron ore spot prices, sending key indexes lower. Platts' 62 percent benchmark fell $1.25 to $183.50 per tonne, its lowest since Jan. 17 and marking its seventh straight session of losses.
Metal Bulletin's 62 percent index .IO62-CNO=MB dropped $1.72 to $181.86 a tonne, and The Steel Index's 62 percent gauge .IO62-CNI=SI was unchanged at 184.10, both hitting their lowest since Jan. 19.
But prices of forward swaps <0#SGXIOS:> rebounded sharply on Friday after recent declines, with the Singapore Exchange-cleared March contract surging 5 percent to $175.37 a tonne and April up 4 percent to $164.25.
"We'll probably see a little bit of hesitancy today after such a big bounce on swap prices on Friday," said Danny Thompson, a broker at Freight Investor Services in Singapore.
"Whenever we see a big move like that market participants prefer to spend a little time digesting the move and trying to understand the implications and where we might go from here before doing anything too aggressive in the market.
"On the physical side of things unless the buyers step in, we should see prices continue to ease down as we go forward into this week."
Given the uncertainty on steel demand and prices, many Chinese steel mills expect iron ore prices to fall below $180 per tonne in the near term, traders said. (Reporting by Ruby Lian and Manolo Serapio Jr.; Editing by Ed Lane)
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