Spot iron ore prices fell as volatile Chinese steel prices kept buyers at bay although steady offers on Wednesday suggested miners were hoping demand may bounce back.
The upcoming Easter holidays were also limiting trades in the iron ore physical market.
"There's a herd mentality among Chinese mills. When one stops buying, they all stop buying and with volatile steel prices, there's little incentive to buy iron ore," said an iron ore trader in Singapore.
Chinese steelmakers, the biggest importers of iron ore, usually look to steel prices when deciding whether to purchase the key steelmaking raw material.
A surge in Shanghai steel rebar futures to record highs in February lifted spot iron ore prices to all-time peaks near $200 a tonne in the same month. Shanghai rebar has dropped around 8 percent since then, spurring a similar decline in iron ore prices.
The most-active October contract on the Shanghai Futures Exchange closed up 0.8 percent at 4,814 yuan a tonne on Wednesday after falling to two-week lows in the previous session.
Chinese steel prices and margins are likely to peak in the near term with more supply coming into the market, Bank of America-Merrill Lynch analysts said.
"(China's) March annualized production is 690 million tonnes, meaning there are still 70 million tonnes or more idle capacity in the market. At current margin, these marginal capacities are profitable and are likely to increase production," they said in a note.
The Steel Index's 62 percent iron ore benchmark .IO62-CNI=SI fell $2.10 to $178.80 a tonne on Tuesday. Platts 62 percent index IODBZ00-PLT dipped 25 cents to $181.
A similar benchmark by Metal Bulletin .IO62-CNO=MB eased 90 cents to $178.96.
MORE INDIAN CARGOES MAY WEIGH
Chinese appetite for iron ore began slipping when quotes for high-grade 63.5 percent ore hit $190 a tonne last week, and caution set in, given signs of slow steel demand in China at a time when construction activity usually kicks in.
ndian ore with 63.5 percent iron content was being offered in China at $185-$187 a tonne, including freight, on Wednesday, unchanged from Tuesday, said Chinese consultancy Mysteel.
Another factor that could weigh on iron ore prices is the possibility of more cargoes out of India, the world's No. 3 supplier, with the removal of the ban on shipments from its key Karnataka state taking effect on Wednesday.
But traders say the impact on prices may not be felt until later this month or in May as it will take time for exporters to resume shipments. The ban was in place since July last year and cut Indian exports from then through February.
In industry news, BHP Billiton , the world's third-biggest iron ore miner after Vale and Rio Tinto , said iron ore output dropped around 1 percent to 33.2 million tonnes in the March quarter from the previous three-month period because of Australia's wet summer although analysts say production should rebound.
"Whilst the iron ore situation was a temporary one, coal would take a relatively long time to resolve itself. Having said that, the pain will be offset to some degree by stronger coal prices," said Mine Life senior resources analyst Gavin Wendt in Sydney. "Iron ore will bounce back. BHP is embarking on a major expansion of its iron ore capacity, but again production may be lower for the full year than what the market would have been expecting."
In Japan, crude steel output fell a smaller-than-expected 2.7 percent in March from a year ago as strong overseas demand offset the impact of the destructive March 11 earthquake and tsunami.