* Shanghai rebar down 11 pct in Sept, off 8.7 pct in Q3
* Spot iron ore extends losses, down nearly 6 pct on month
* Slow trading ahead of week-long China holiday (Updates rebar price)
By Manolo Serapio Jr
SINGAPORE, Sept 30 (Reuters) - Shanghai steel futures rose 1 percent on Friday ahead of a week-long break in China, but posted their biggest monthly fall ever as signs of slower steel demand at home and an uncertain global economy weighed on prices.
The weakness in steel prices in China, the world's biggest consumer and producer, has spilled over to prices of raw material iron ore, which fell in September for the first time in three months.
"The credit tightening is increasingly affecting our business," said an iron ore sales official in Shanghai.
"Even state-owned steel mills are finding it more difficult to obtain enough credit from banks while they can't get cash from weak steel sales."
China has repeatedly raised interest rates and banks' reserve requirements to tame inflation that hit a three-year high of 6.5 percent in July before slowing to 6.2 percent in August.
The most-traded January rebar contract on the Shanghai Futures Exchange gained 41 yuan to close at 4,339 yuan a tonne.
On a continuing contract basis, rebar SRBc4 dropped 11 percent in September, the most ever for a month. For the third quarter, the construction steel product fell nearly 9 percent, the steepest since the second quarter of 2010.
Falling steel prices cut appetite of Chinese mills for iron ore, driving spot prices lower. The key Platts-based reference price IODBZ00-PLT slipped 0.6 percent to $170.75 a tonne on Thursday, the lowest since March 29, and down 5.7 percent for the month.
"The current level of Shanghai steel rebar futures suggest the iron ore price may ease to around $150-$160 per tonne," Commonwealth Bank of Australia said in a note.
"We think the cost support for Chinese producers is $150. If spot prices fall below this level, higher cost Chinese producers would start to lose money and may close. This should provide support for seaborne iron ore volumes and prices," it added.
Other iron ore price indexes also declined on Thursday. The Steel Index's 62-percent grade benchmark .IO62-CNI=SI dropped 0.6 percent to $171.50 a tonne and Metal Bulletin's similar gauge .IO62-CNO=MB edged down 0.2 percent to $170.18. Both are the lowest since early July.
Trading in the physical iron ore market was thin this week and is bound to slow to a halt next week with top buyer China off for the National Day holiday.
"I don't think we'll see much trading today because, if for some reason, transactions are not concluded within the day, traders will have to wait until people return to work on Oct. 10," said an iron ore trader in China's eastern Shandong province.
Prices of Singapore Exchange-cleared forward swaps <0#SGXIOS:>, which suggest where investors see spot prices going, dropped for a second day, with the nearby October contract down $2.33 at $158.17 a tonne, at least $12 cheaper than spot rates.