March 12 (Reuters) - China has widened a ban on BHP iron ore for the second time in two weeks, escalating a months-long contract dispute with the world's third-largest supplier of the key steelmaking ingredient.

China Mineral Resources Group, the state-run iron ore buyer, informed domestic steel mills and traders on Thursday that, starting next week, they would be prohibited from taking delivery of Newman fines, a popular BHP iron ore stored at ports, three sources with knowledge of the matter told Reuters.

However, customers would still be allowed to take delivery of cargoes within the next five working days, according to two of the sources. All sources requested anonymity due to the sensitivity of the matter.

Beijing has been progressively tightening restrictions on local steel mills and traders buying BHP iron ore for the past six months, as it negotiates with steelmakers over the terms of its 2026 contract.

China banned purchases of Jimblebar fines, another type of iron ore, in September, followed by the Jinbao product in November.

Traders were told last week to buy fewer new cargoes of Newman fines, lumps and Mac fines, though the directive allowed for the purchase of those grades of iron ore already stored at ports.

This week's ban narrows the permitted range of products to stocks of Newman lumps and Mac fines that are already in port storage.

Benchmark April iron ore prices on the Singapore Exchange climbed by more than 3% in afternoon trading on Thursday.

BHP declined to comment and CMRG did not immediately respond to a Reuters request for comment.