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Summary form only given. Iron doped lithium niobate is a high nonlinearity medium in which photorefractive two-wave mixing has long been demonstrated. For the case of contra-directional wave mixing where the signal beam is derived from the Fresnel reflection of the pump beam, the wave mixing efficiency is dependent on the incident intensity. To increase intensity, the spot size of the incident laser beam needs to be reduced. However, when the spot sizes are so small that the Rayleigh range is smaller than the crystal length, the effect of diffraction :becomes important. In this work, we present the measurements of two-wave mixing efficiency as a function of spot size and focal position in iron doped lithium niobate crystals of different lengths. We find that the maximum efficiency achieved is dependent on the focal position in the crystal, as well as on the crystal length. The dependence of the efficiency on the linear absorption in the material, which is varied by changing the dopant concentration, was also measured. Theoretical calculations of two-wave mixing with diffraction effects and linear absorption taken into consideration were performed. Values of the gain coefficients and "dark current intensity" were extracted by matching the experimental results with the theoretical calculations.