UPDATE 2-Iron ore surges 25 pct, above $100/T, on China demand

* Indian iron ore regains $100/T level in China

* Prices seen rising further on Chinese demand

* Steelmakers squeezed by rising ore, steady steel prices

* here

* here (Adds background, comments, changes dateline, PVS Shanghai)

By Alfred Cang and Nick Trevethan

SHANGHAI/SINGAPORE, Nov 10 (Reuters) - Benchmark spot Indian iron ore prices in China regained the $100-a-tonne mark on Tuesday for the first time since mid-August, but a slower rise in steel prices is creating tough conditions for Chinese mills. Strong demand from China, the world's largest steel-making nation, with record output in recent months, worries about supplies from India and lack of spare ion ore capacity in the desert of Western Australian could mean the 25 percent surge in prices in the past few weeks will continue.

"A lot of smaller mills in China are running below capacity. The industry is cranking up and so the China iron ore trade data will probably surprise on the upside," said Mark Pervan, senior commodities analyst at ANZ in Melbourne.

"There has been a 7 million tonne draw on (Chinese) port stocks in the past six weeks or so and Port Hedland is loading record numbers of cargoes. All that paints a strong picture for apparent demand."

Last week ore inventories at major Chinese ports fell by 2.4 percent.

Ore of 63/63.5 percent iron content for delivery in the future traded at $100-$102 a tonne, including freight costs, with some miners asking prices of $106-$108 a tonne, industry consultancy Mysteel said.

"The supply scenario is really bad in the east (of India)," a dealer in a large international trading company based in south India said.

"Cargo is available, but because of problems, movement is very slow. The last deals were done last week at $100 a tonne. This week it has broken $101, so probably it may run up further. Sellers' expectation is $105."

Worries over supply shortages emerged after an official said the government of the eastern Indian state of Orissa would inspect several iron ore mines in a crackdown on firms infringing mining or environmental rules. [ID:nBOM480760]

"The market is hot, but actually we do not have much to sell. Everybody is seeking more sources in the market and we have heard that deliveries could fall quickly in coming months," said an iron ore trader in the eastern province of Zhejiang.

India's iron ore exports jumped an annual 88 percent in September but it still ranks behind Australia and Brazil, while China, trying to broker a deal for 2010 annual iron ore contracts, is unlikely to see much more material from its main suppliers. Rio Tinto Ltd/Plc (RIO.AX) (RIO.L), the world's second-largest iron ore miner, is running its Australian operations at maximum capacity to meet strong demand, its chief said on Tuesday.