UPDATE 2-Vale says won't budge on ore benchmark for China

* Vale says iron ore benchmark price already set

* Chinese must accept prices or go to spot market

* Ore benchmarking system under increasing pressure (Recasts, adds details, background)

RIO DE JANEIRO, July 7 (Reuters) - Brazilian miner Vale said Tuesday that China will have to either take or leave existing iron ore benchmark prices negotiated with other Asian mills, refusing to offer greater discounts amid tense price talks.

China is demanding price cuts of at least 40 percent from last year's benchmark ore prices, threatening to unravel a 40-year-old system for setting the mineral price as steel mills increasingly look to a nascent spot market for supplies.

"The benchmark is given. It is established. It is clear," Vale Chief Executive Roger Agnelli said at a news conference. "The client chooses what he wants. The Chinese need to choose what they want."

Vale has for years insisted it does not operate on the spot market, though it has said it is willing to deliver its products in the way clients want.

Ore prices have for years been set in talks between mills and the world's largest global miners -- Vale, (VALE.N), Rio Tinto and (RIO.L) and BHP Billiton (BLT.L) -- and set through annual contracts that expire in June.

China's steel mills' association has threatened to walk away from benchmarking talks if it does not get the cuts its looking for, and buy ore on the growing spot market after economies began contracting after a five-year commodities run-up.

But last week sources at the China Iron and Steel Association (CISA) told Reuters the group is prepared to accept cuts only slightly deeper than the 33 percent cuts accepted by other Asian mills.

If the steel mills and iron miner fail to reach a compromise, miners are free to sell ore under any terms agreed by the buyer and the seller.

Analysts believe the most likely long-term format will be sales based on a combination of quarterly or semiannual spot price averages at time of delivery and the fixed prices at 33 percent below 2008/09 agreed by steelmakers in Japan, South Korea and Taiwan. (Reporting by Brian Ellsworth; Editing by John Picinich)