* Rio, Nippon Steel agree 33 pct fines cut, 45 pct for lump
* Deal shifts pressure onto China mills, seeking deeper cut
* Rio shares edge up, Nippon Steel softer after deal flagged (Adds POSCO reaction, analyst comment)
SYDNEY, May 26 (Reuters) - Rio Tinto and Nippon Steel agreed to cut key iron ore prices by a third in this year's first contract deal, setting a benchmark that China's embattled mills will almost certainly resist after six years of surging prices.
The long overdue settlement for contracts beginning from April was in line with levels that were rumoured last week, and will bring some relief to both miners and mills, which have been in deadlocked talks as demand for both steel and its main raw material collapses amid the worst recession since World War II.
But analysts said miners may find it tougher in negotiations with Chinese steelmakers like Baosteel (600019.SS), which have fiercely resisted anything less than a 40 to 50 percent reduction in prices that have roughly quadrupled since 2002.
"I don't think they will get the same outcome with the Chinese," said Mark Pervan, head of commodities research at Australia and New Zealand Banking Group in Melbourne.
"They struck the deal with the Japanese first as they realise it will be tougher task with the Chinese, which is a much bigger market -- you could see a further 5-10 percent added to the cut."
If the Chinese mills break the tradition of following the first deal it will be yet another crack in the decades-old system of setting iron ore prices on the basis of annual negotiations, a process already under threat from growing spot market trade.
Rio (RIO.AX) (RIO.L), the world's second-largest producer, said it had agreed to sell its Pilbara and Yandicoogina fine ores to No. 2 global steelmaker Nippon Steel Corp (5401.T) at 97 U.S. cents per dry metric tonne unit versus 144.66 cents last year for the current shipping year, a reduction of 33 percent.
Higher-quality lump, for which it charged a premium last year, will sell for 112 cents a tonne, down nearly 45 percent from 201.69 cents, a deeper for customers primarily in Japan and South Korea. Chinese mills mainly buy iron ore fines.
Here is a graphic showing Asian iron ore prices since 1992: here
BHP Billiton Ltd (BHP.AX) (BLT.L) declined to comment on its talks, while South Korean steel maker POSCO (005490.KS), the world's fourth largest, said it was still negotiating with Rio and had not decided whether it would follow Nippon Steel's lead.
JFE Holdings Inc (5411.T) and Sumitomo Metal Industries Ltd 5405.T also said they had agreed prices with Rio.
Officials at China Iron & Steel Association and Baosteel could not immediately be reached for comment.
Rio shares turned positive on the news, rising as much as 2.5 percent and helping Australia's benchmark S&P/ASX 200 index gain 0.8 percent to 3,767. Rio last traded 1.5 percent higher at A$65.05 and BHP rose 0.5 percent to A$34.03, while Nippon Steel shares slipped 0.9 percent on the day.
Shares in new producer Fortescue Metals Group (FMG.AX), which sells all its iron ore to China but has not been involved in any price negotiations, rose 4.4 percent to A$2.63.
"This is a good start. What's going to be somewhat more telling is to confirm that the Chinese will follow suit. That's probably more critical," Fortescue's executive director, Graeme Rowley, told Reuters.
ANZ's Pervan said the new fines price is equal to $62.50 a tonne, or $72.50 including a $10 per tonne freight charge from Western Australia, suggesting that Rio Tinto won a $5 per tonne premium to the delivered China spot price of $67.50.
The deal ends years of steadily rising iron ore prices, including the 96 percent increase that Rio Tinto and BHP won last year for its Pilbara lump ore, as China's double-digit economic growth fuelled the rapid expansion of its steel industry.
Global steel prices have since more than halved after hitting record highs above $1,000 a tonne last summer and the market conditions remain dire, as stimulus packages around the world have yet to boost real demand and drain excess oversupply.
Against that backdrop, the Chinese mills have been adamant that they will accept nothing less than a full reversal of last year's increase, nearly halving prices to ease the financial pain of tumbling steel prices.
But their bargaining position may have been undercut by the dramatic decline in domestic iron ore production, which, by some estimates, has halved because of the sharp fall in spot market prices, forcing China to import record volumes of ore from abroad to help feed steel demand propped up by fiscal stimulus.
Rio Tinto's iron ore chief executive, Sam Walsh, told a mining conference in Canberra on Tuesday that demand for ore from China had been strong in recent weeks, helped by the closure of high-cost iron ore mines in China.
"That has opened up an opportunity for us and I'm very pleased to say that for the last six weeks our operations have been running absolutely flat out," Walsh told reporters on the sidelines of the conference.
Brazilian miner Vale (VALE5.SA) (VALE.N) has allowed the Australian miners take the lead in this year's negotiations after having missed out on the peak of last year's pricing, settling an early deal with customers at a 71 percent rise.
For a factbox on global iron ore price forecasts, [ID:nSEO368386]
For a factbox on Asian iron ore prices since 1992, [ID:nSP361093] (Additional reporting by Denny Thomas, Sonali Paul and Bruce Hextall in Australia, Jonathan Leff in Singapore, Miyoung Kim in Seoul, Tom Miles in Beijing and Yuko Inoue in Tokyo; Editing by Clarence Fernandez and Jonathan Leff)