* Spot iron ore at $98.50 a tonne, lowest since Sept 2012
* Weak China steel market as Shanghai rebar near record low
* Iron ore stocks at China ports at record high 112.55 mln T
* Rio, Fortescue shares sag to multi-month lows (Recasts, adds details, updates prices)
By Manolo Serapio Jr and Maytaal Angel
SINGAPORE, May 19 (Reuters) - Spot iron ore prices fell to a 2-1/2 year low on Monday while China and Singapore futures hit record lows, under pressure from rising supply and weaker Chinese steel markets.
With prices down 25 percent this year, a sustained decline in iron ore threatens to squeeze out high-cost producers, led by miners in top consumer China. That means China's iron ore imports may stay strong unless steel demand weakens to such an extent that mills curb output.
"Chinese steel mills have high finished inventories and port stocks of iron ore are climbing so there's going to be less appetite to buy iron ore in the next few weeks," said Sucden analyst Kashaan Kamal.
Spot iron ore for immediate delivery to China .IO62-CNI=SI dropped 2.1 percent to $98.50 a tonne, its lowest since September 2012, according to data provider Steel Index.
Top iron ore miners Vale, Rio Tinto and BHP Billiton are boosting output, confident their low-cost business will prevail over higher-cost suppliers to China. These miners have a cash cost of as low as $20 a tonne, about one fifth of what Chinese miners spend.
But China's capacity to absorb supply is at risk as growth slows. Economists say Beijing may need more stimulus measures to achieve its 7.5 percent growth target this year.
"Now that we broke through $100, I think that's a very bearish sign. It shows you there's a lot of supply around," said a trader in Singapore.
Iron ore futures on the Dalian Commodity Exchange touched a low of 703 yuan a tonne, the weakest for a most-active contract since the bourse launched the product in October last year. It closed down 2.1 percent at 707 yuan.
On the Singapore Exchange, iron ore for delivery in July fell 1.3 percent to $97.75 a tonne, the lowest level since it launched iron ore futures in April 2013. The August contract dropped 1 percent to $97.84.
Meanwhile rebar futures fell for a fourth session on Monday to near record lows reached on Friday. The most-traded rebar for October delivery on the Shanghai Futures Exchange eased 0.6 percent to settle at 3,080 yuan ($490) a tonne, after hitting an all-time low of 3,063 yuan in the previous session.
"Since the rebar has been so hit, it's taken out the confidence of the Chinese steel market," said Jamie Pearce, head of iron ore broking at SSY Futures.
Steel output at China's top producing Hebei province slipped 7.1 percent in April from a year ago despite increasing output nationwide, as Beijing's war on pollution showed it is curbing industrial output in the region.
Falling iron ore prices will also cut into mining companies' earnings. Rio Tinto shares dropped 3 percent to seven-month lows and Fortescue Metals Group lost almost 5 percent to hit its weakest since September last year. BHP declined 1.7 percent.
China imported 83.39 million tonnes of iron ore in April, the second highest monthly volume on record, sending stocks of imported iron ore at Chinese ports to a record high 112.55 million tonnes as of May 16, according to consultancy Steelhome.
But a looming workers' strike at Port Hedland, from where a quarter of global iron ore exports are shipped, may help stem a decline in prices, traders said. Tugboat workers at Australia's main iron ore port will strike if they are unable to resolve a dispute over vacation and pay.
$1 = 6.2334 Chinese yuan Reporting by Manolo Serapio Jr and Maytaal Angel, editing by David Evans