UPDATE 1-Usiminas to raise Brazil steel prices-sources

* Prices for flats increased between 5 pct-7 pct

* Shares of Usiminas rally on news of price hike

* Comes as company faces severe cost, market woes

SAO PAULO, July 3 (Reuters) - Usiminas, Brazil's largest producer of flat steel, informed some distributors this week of plans to raise prices for most products between 5 percent and 7 percent, two sources with knowledge of the situation told Reuters on Tuesday.

Usiminas, mired in its worst crisis in decades, is raising prices for products widely used in the auto and home appliances sectors to restore eroding margins, both sources said. The move will first impact distributors and then extend to other clients within the next month.

Some of the increases were announced on Monday, said one of the sources, who declined to be quoted because of the sensitivity of the issue. A spokesman for Usiminas in Belo Horizonte, Brazil declined to confirm the hikes, saying the company does not comment on its pricing policies.

Usiminas gained pricing clout with customers after Brazil's currency, the real, sank 9.1 percent in the quarter -- making the cost of imported steel less affordable in the local market. The real has gained ground this month against the U.S. dollar, which may limit the ability of Usiminas and rival CSN to boost prices.

Usiminas' shares rallied on speculation the move will help compensate rising costs and dismal sales perfomance in the current quarter. Usiminas' preferred shares jumped 8 percent to 6.75 reais, the highest level since June 20.

Common shares rose 5 percent to 8.12 reais, the highest since June 26. Both shares have shed 37 percent and 55 percent, respectively, this year.

Prices for long steel products, which are widely used in homebuilding and heavy construction, have already begun to rise and further increases are expected in coming months, analysts said.

Usiminas posted its first loss in two years in the first quarter as expenses surged and revenue tumbled. The numbers showed the company's vulnerability to swings in the value of Brazil's currency, its limited access to stable sources of raw materials and energy, and uncertainty about the outlook for domestic and global growth.