BEIJING/NEW DELHI, May 25 -- Spot iron ore prices fell below $150 a tonne for the first time in two months amid weakening demand from China, the world's largest user of the commodity.

Data from the Steel Index .I062-CNI=SI showed prices down $3.6 to $148.3 per tonne on Monday, down 20 percent since late April as buyers fret about the resilience of China's economy and the strength of steel demand in the second half of the year.

"Steel demand growth will certainly slow down in the second half of this year, and even early next year, mainly because of concerns about the Chinese economy and ongoing controls over the property market," said Judy Zhu, commodities analyst with Standard Chartered Bank in Shanghai.

At the end of last month, iron ore prices reached a 2010 high of $185 and with some traders quoting prices of around $195, many expected the psychologically significant $200 level to be breached -- but worried steel mill buyers began to baulk at the soaring costs and started to run down their inventories instead.

Traders said the relatively slow rate of growth in steel prices last month already suggested that the surge in iron ore was not sustainable.

"Everyone was expecting prices to drop off because steel prices hadn't caught up to iron ore," a commodities broker in Hong Kong said.

Steel prices have plummeted almost 11 percent since reaching their highest point of the year in the middle of last month.

A trader in India said demand from China remained weak, flat after the country's May Day holidays as expected.

"We are offering $148 a tonne (for 63.5 grade), but the buying sentiment is still weak," he said.

Traders in China said many steel mills were switching to local ores as domestic producers were offering substantial discounts -- average domestic ore prices were $16 a tonne lower last week, according to industry consultancy Mysteel.

While Chinese customers are still anxious to maintain supplies, they have been searching frantically for cheaper options, the Hong Kong broker said.

"They (steel mills in China) are just phoning around and seeing if there's anything distressed that they can snap up cheaper. I'm sure once they've heard there are no distressed cargoes any more they will return to the normal offers."

A trader in eastern China's Shandong province said he'd seen prices for Indian 63.5 percent iron ore being quoted as low as $140 a tonne in the last week, but the Hong Kong broker said they had probably already hit bottom.

"I think they will consolidate at these levels and then gradually go up, but it depends on what happens in the steel market."