* Shanghai rebar gains after 4-day drop, but near recent low
* Bearish sentiment intact, traders see further decline
By Manolo Serapio Jr
SINGAPORE, May 17 (Reuters) - Spot iron ore prices fell to their lowest in nearly three months on Thursday, knocked by limited buying interest from Chinese mills adjusting to weak steel demand, which has led to some traders holding cargoes rather than selling.
Steel futures in top consumer China regained some ground after falling for four straight days, though prices remained within striking distance of 5-1/2-month lows hit on Wednesday.
The gain in Shanghai rebar futures followed a rebound in other commodities, which are drawing some investor interest after similarly sinking to multimonth lows this week.
"Fundamentally I still don't see any near trigger point that will support steel prices, so I believe there's further room for correction," said a Hong Kong-based iron ore trader.
The most-traded rebar contract for October delivery on the Shanghai Futures Exchange rose 1 percent to 4,092 yuan ($650) a tonne at the close.
Rebar, used in construction, earlier hit a session low of 4,051 yuan, near the previous day's low of 4,050 yuan, a level last seen on Nov. 28.
Spot steel prices have also been dropping, with billet in China's key Tangshan area at 3,650 yuan per tonne on Wednesday from 3,820 yuan in late March, traders said.
Benchmark iron ore with 62 percent iron content .IO62-CNI=SI dropped 0.6 percent to $135.10 a tonne on Wednesday, according to the latest data from Steel Index. That matched a low last seen on Feb. 20 and marked iron ore's seventh straight day of decline.
The sustained decline in iron ore prices has forced some traders to stop selling cargoes.
"One of the big traders could not find good buyers at this time so they have held some China-bound ships in Singapore for several weeks," said a Shanghai-based trader.
"Because they can't get the price they want in the current market and they probably don't want to take any losses at the moment, so they choose to wait," he said, adding the capsize cargoes include iron ore from Brazil and Africa.
Spot sales by miners this week have drawn little interest, with prices either falling or cargoes being skipped.
Top miner Vale sold a 195,000-tonne cargo of 63.42-percent grade iron ore fines at $133.62 a tonne at a tender on Wednesday, down sharply from a similar grade sale of $139.05 previously, traders said.
Rio Tinto has offered 61.5-grade Pilbara iron ore fines at $140 a tonne since Tuesday, but the Shanghai trader said he has yet to hear whether the cargo has been sold.
BHP Billiton is selling around 190,000 tonnes of Newman and MAC fines at a tender on Thursday, traders said.
"The general situation has not changed. Steel production is still high and demand is still sluggish. Steel mills should start cutting production to reduce supply of steel in the market, then this will help steel prices to recover," said the Shanghai trader.
On a daily basis, China's crude steel output topped 2 million tonnes in April versus 1.986 million tonnes in March, based on the latest data from China's National Bureau of Statistics.
Reflecting the weak market, there were no deals for a second day on Wednesday on China's physical iron ore trading platform, which debuted last week, according to the website of platform operator China Beijing International Mining Exchange.
Shanghai rebar futures and iron ore indexes at 0710 GMT
Contract Last Change Pct Change
SHFE REBAR OCT2 4092 +42.00 +1.04
PLATTS 62 PCT INDEX 136.25 -1.00 -0.73
THE STEEL INDEX 62 PCT INDEX 135.1 -0.80 -0.59
METAL BULLETIN INDEX 134.87 -0.95 -0.70
Rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1 = 6.3222 Chinese yuan)