China's Sinosteel Corp has lifted its stake in emerging Australian iron ore producer Midwest Corp Ltd to 18.7 percent from 11.1 percent through on-market buying, Midwest said in a statement Tuesday.

The move by the state-owned steel group is likely to block Murchison Metals Ltd's proposal to merge with Midwest.

Murchison argues a merger would allow most efficient development of the two companies' iron ore deposits and associated infrastructure in the mid-west region of Western Australia.

Sinosteel in December made a 1.15 billion Australian dollar incomplete and non-binding bid for Midwest, pitched at 5.60 dollars a share.

The Chinese group already has an off-take agreement in place for Midwest's Weld Range hematite project.

A report in Friday's South China Morning Post said Sinosteel was seeking a stake of about 20 percent to gain more bargaining power.

"Sinosteel wants (more) off-take (agreements) and an over 15 percent stake should be enough to secure that," the report said.

"It might also want similar agreements on Midwest's Koolanooka magnetite project as well as other mines," the paper said.

Murchison, which holds 4.78 percent, is offering one of its shares for each 1.08 Midwest shares.