Iron ore has lost nearly 30 percent since early September when falling steel prices in China suggested slowing demand from the construction sector, which was behind the surge in steel production to a record pace earlier this year.
Losses deepened when the Chinese returned from a week-long holiday earlier this month as steel prices continued to drop in what was normally a strong consumption season.
Iron ore with 62-percent iron content fell 7.2 percent to $128.50 a tonne on Tuesday, according to Platts. It was the biggest percentage drop for the reference price index since Platts began publishing it in November 2008.
Global miners including top iron ore producer Vale and second-ranked Rio Tinto use the Platts index, based on spot transactions in China, to fix supply contract rates for clients.
The rapid drop in iron ore prices "implies demand for steel in China is pretty bad and a lot of steel mills have to cut production so the whole economy is bad", said Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong.
"If iron ore prices drop so much, it doesn't mean (Chinese mills') profit margin will improve because steel demand has been dropping," he said.
The price of hot rolled coil in China fell 8.7 percent to 4,123 yuan a tonne at the end of last week, while rebar shed more than 6 percent to 4,296 yuan a tonne, according to data compiled by Bank of America-Merrill Lynch.
The world's biggest steel consumer and producer, China, buys around two thirds of the global seaborne iron ore, with imports exceeding 600 million tonnes in 2010.
Rio Tinto on Tuesday blamed the steep fall in iron ore prices to a strategy by bigger rival Vale to divert shipments destined for Europe to China.
On Wednesday, Australian iron ore miner Fortescue Metals Group said prices could start turning higher "within weeks" if Chinese steel producers conclude destocking of inventories.