* Narrow gap between rebar and HRC shows oversupply in flat steel

* Iron ore stabilises after four-week slide, but outlook shaky

(Updates prices)

By Manolo Serapio Jr

SINGAPORE, March 21 (Reuters) - Shanghai rebar futures fell 1 percent on Friday and dropped for a sixth consecutive week amid lean steel demand that has led to an uneventful debut of China's hot-rolled coil contracts.

A seasonal pickup in construction demand in China may not be strong enough to support steel prices as the overall economy faces headwinds from weak external demand that has hit its manufacturing sector, and a reform-minded Beijing.

The most-traded rebar for October delivery on the Shanghai Futures Exchange SRBcv1 gave up 34 yuan to close at 3,220 yuan ($520) a tonne, after falling as low as 3,211 yuan.

Rebar, a construction steel product, was down 0.6 percent for the week, its sixth weekly fall since Chinese markets reopened after the Lunar New Year break in early February.

The most-active October hot-rolled coil (HRC) SHHCV4 gained 0.2 percent to end at 3,324 yuan a tonne from a nominal close of 3,316 yuan. The contract which traded for the first time on Friday opened almost 2 percent lower at 3,252 yuan and touched a low of 3,230 yuan before regaining some ground.

There is typically a gap of around 500 yuan per tonne between rebar and HRC, a flat steel product used to make cars and home appliances, said Helen Lau, a senior analyst at UOB-Kay Hian Securities in Hong Kong.

But that spread is just above 300 yuan at the moment, with standard HRC steel sold at 3,544 yuan in China and rebar at around 3,200 yuan.

"This spread is too low and it shows there is oversupply of HRC in China. The gap may narrow further if we see more seasonal demand in construction and manufacturing remains weak," Lau said.

The HRC futures in Shanghai has a contract specification of 5.75 mm in thickness, according to the exchange, a lower grade product hence its smaller price gap with rebar versus the standard 2.75 mm HRC.

"We've seen some pickup in steel demand in the past two weeks but it's not really strong enough to push prices significantly higher. A lot of steel mills are still losing money," a trader in Shanghai said.

Total steel stocks held by Chinese traders stood at 20.25 million tonnes as of March 14, down marginally from 20.73 million tonnes in the last week of February, based on data from industry consultancy Mysteel.

China's top steel producing Hebei province saw output of crude steel drop 5.7 percent from a year ago to 32.636 million tonnes in the first two months of 2014. ID:nL3N0MI0SL

The sluggish steel market was likely to pile more pressure on iron ore prices that were struggling to recover from last week's rout.

"There was some short-term demand for iron ore driven by mills that took advantage of the price decline. But I see further downside to the price because the fundamentals for the steel market haven't really changed," said the Shanghai trader.

Iron ore for immediate delivery to China .IO62-CNI=SI was little changed at $110.70 a tonne on Thursday, according to data provider Steel Index.

It was up half a percent so far for the week after a four-week decline. The price fell 8.3 percent on March 10 to a 17-month low of $104.70, its steepest drop since the global financial crisis in 2009.

At the Dalian Commodity Exchange, iron ore for delivery in September DCIOcv1 fell 1.5 percent to 733 yuan a tonne.

Shanghai rebar futures and iron ore indexes at 0734 GMT

Contract Last Change Pct Change

SHFE REBAR OCT4 3220 -34.00 -1.04

DALIAN IRON ORE DCE DCIO SEP4 733 -11.00 -1.48

THE STEEL INDEX 62 PCT INDEX 110.7 +0.20 +0.18

METAL BULLETIN INDEX 109.88 -0.02 -0.02

Dalian iron ore and Shanghai rebar in yuan/tonne

Index in dollars/tonne, show close for the previous trading day ($1 = 6.2275 Chinese yuan)

(Editing by Richard Pullin and Himani Sarkar)

((manolo.serapio@thomsonreuters.com)(+65 6870 3884)(Reuters Messaging: manolo.serapio.thomsonreuters.com@reuters.net))

Keywords: MARKETS IRONORE/