* RBA holds interest rates, flags new uncertainty over China
* Pressure mounts for rate cut as another miner cuts investment
* Net exports and govt spending point to solid Q2 GDP growth
* Aussie dollar rallies from six-week low
By Wayne Cole
SYDNEY, Sept 4 Australia's central bank held interest rates at 3.5 percent for a third straight month on Tuesday saying past cuts had yet to be fully felt, even as another local miner blamed falling export prices for slashing ambitious expansion plans.
The Reserve Bank of Australia (RBA) ended its September policy meeting sounding cautiously upbeat on the domestic economy, a view that should be supported by growth figures for the second quarter due out on Wednesday.
Yet there was also an admission of doubt on China, a shift for a central bank that has been doggedly optimistic on Asia's biggest economy and Australia's most valuable export market.
"Growth in China remained reasonably robust in the first half of this year, albeit well below the exceptional pace seen in recent years," said RBA Governor Glenn Stevens. "Some recent indicators have been weaker, which has added to uncertainty about near-term growth."
The slowdown in China has savaged prices for key commodities such as iron ore and led miner Fortescue Metals Group on Tuesday to slice planned investment spending for fiscal 2013 by $1.6 billion to $4.6 billion.
"This has happened much faster and the fall is much sharper than anyone had anticipated," Fortescue CEO Nev Power told a media briefing on Tuesday.
Falling commodity prices are a key reason investors are wagering the RBA will have to cut rates further, following easings in May and June. Interbank futures put a 60 percent probability on a move in October and are more than fully priced for a cut to 3.25 percent in November.
Overnight indexed swaps, which show where the market thinks the cash rate will be over time, put rates at 2.87 percent in 12 months. Yields on Australian 10-year bonds are down at 3.00 percent, so it is cheaper for the government to borrow for a decade than for banks to borrow overnight.
"For us the only thing of significance was the softening of its assessment of China and Asia where they talked about some weaker recent indicators in China and weaker Asian growth," said Su-Lin Ong, a senior economist at RBC Capital Markets.
"There doesn't seem to be any real urgency, but we are still looking for a cut before year end."
The Fortescue news initially tipped the Australian dollar down to a five-week trough of $1.0224, before it later steadied at $1.0270.
A drop in the currency could actually please the central bank as its persistent strength has been at odds with the weakness in the country's commodity prices.
Spot iron ore, Australia's single biggest export earner at more than A$60 billion a year, has tumbled by one-third since early July . If sustained, that will eat into both miners' profits and government tax receipts.
Q2 GROWTH STILL LOOKING OK
But while some commodity prices have been falling, the country has been selling more of the product, and it is export volumes that matter when measuring inflation-adjusted gross domestic product (GDP).
Data out on Tuesday showed export volumes rose 3 percent in the second quarter from the previous three months, to add 0.3 percentage points to economic growth. The country's current account deficit, the broadest measure of trade and investment flows, narrowed to A$11.8 billion, from A$13 billion in the first quarter.
The combination of the export volumes with resilience in household spending and business investment makes analysts still expect a robust reading on second quarter economic growth on Wednesday.
Forecasts are for a rise of 0.7 percent in the second quarter, on top of the first quarter's resounding 1.3 percent increase. That would leave Australia's GDP -- A$1.4 trillion at the end of March -- 3.6 percent higher than the second quarter of last year, handily outpacing most of its rich-world peers.
Also adding to growth was a surprisingly strong 1.9 percent increase in government spending with investment the highest in two years. This could add almost 0.5 percentage points to GDP.
Total federal and state government spending amounts to 23 percent of annual GDP. They are the biggest employer, with around 1.9 million workers.
Still, fiscal policy is being steadily tightened as the Labor government strives to return the budget to surplus by June 2013, years if not decades before many other rich nations aim to end deficits.
Prime Minister Julia Gillard on Tuesday again sought to allay concerns over the economy, saying reports of the death of the mining boom were exaggerated and benefits would flow for decades yet.
"I talk of "decades" because the Asian Century stands firmly behind the peaks and troughs of the business cycle," she told a conference in the mining centre of Perth. "It's happening on our doorstep. And it's not even half-way done."