(Adds OECD figures)

* Provisional duties one step in EU investigation

* European steel industry body says measures needed

* OECD figures show Iran a rising steel power

By Barbara Lewis and Georgina Prodhan

LONDON/FRANKFURT, March 29 (Reuters) - The European Commission has decided it will not impose provisional duties on hot-rolled steel from Brazil, Iran, Russia, Serbia and Ukraine, but could still find the countries have breached rules on unfair competition, industry sources said on Wednesday.

The EU executive has a deadline of April 7 to announce whether it is imposing provisional duties on the steel after complaints it is being sold into Europe at unfairly low prices that make it hard for EU manufacturers to compete.

The sources, speaking on condition of anonymity, said the Commission had decided against provisional duties, but that is only one step.

The Commission had no immediate comment.

Eurofer, which represents the European steel industry, says duties are necessary to protect a sector that is only just recovering from a steel price crash in 2015.

“If the Commission does not tackle excess production beyond China, it exposes our sector to the destructive forces of global excess capacity in steel,” Eurofer said in a statement.

Any decision not to impose duties on hot-rolled flat products, used in construction and machinery, from Iran and four other countries would be incomprehensible, it added.

Historically, Eurofer has been most concerned about China, the world’s biggest steel producer, but now China has begun to rein in its output and Indian expansion is beginning to slow, it says a new threat is from Iran.

Iran has ambitious plans for a sector it hoped would supply a growing domestic economy following the easing of international sanctions.

But a deal in 2015 in which Iran would curb its nuclear programme in return for a relaxation of sanctions, has had less impact than foreseen as foreign partners have struggled to find financing that does not conflict with continued U.S. strictures.

A report by the Organisation for Economic Cooperation and Development, seen by Reuters, said steel capacity had continued to expand in 2016, rising by 1.4 percent from 2015 to reach 2.39 billion tonnes globally.

Iran stood out, with 19 Iranian new capacity projects between now and 2019, for a total of nearly 24 million tonnes of extra capacity in addition to an estimated 28 million tonnes achieved so far.

However, there could be obstacles as international companies struggle to overcome the challenges of financing.

According to the OECD report, in China, steelmaking is stabilising at around one billion tonnes per year and there are indications it has exceeded a goal to reduce capacity by 45 million tonnes in 2016, as part of a 100-150 million tonne closure target up to 2020.

Capacity in India reached 125.8 million tonnes per year by 2016, up from 56 million tonnes 10 years earlier.

However, the rate of expansion is expected to slow. For instance, the OECD said Tata had postponed 3 million tonnes per year of new capacity initially expected to become operational in 2016. (Editing by David Evans)