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NY cotton recovers slightly after USDA report sent it lower

* USDA report most bearish since 1970s - Knight Futures

* Open interest hits mid-June highs on short selling

NEW YORK, Oct 12 (Reuters) - Cotton futures in New York were higher on Friday tentatively recovering some ground lost on Thursday when the U.S. government published what some traders said was the bleakest crop report in decades.

Traders see little to support prices though, with a record surplus expected in the marketing year to end-July 2013 and U.S. producers preparing to sell their crops ahead of the harvest.

ICE's most-actively traded December futures contract

settled at 71.36 cents a lb, up 0.65 cent, or 0.9 percent, partially offsetting the almost 2-percent drop a day earlier. Prices were little changed on the week, having dropped 0.2 percent.

Volumes were low, with just 15,533 lots traded on the day, as growers sat on the sidelines hoping for a prices to rally even as speculative investors continue to build a net short position.

"We've got producers who need to do some selling, but are holding out," said a trader.

The rise in open interest this week - hitting levels last seen in mid-June - signaled further short selling by speculative investors, traders said.

Open interest, representing the number of outstanding contracts, rose to over 195,000 lots on Thursday, up 3 percent since last Friday.

Hedge funds and specs switched to a net short futures and options position last week, betting on lower prices ahead of the Northern Hemisphere harvest.

The market also showed resilience to U.S. weekly data that revealed export sales of upland cotton totaled 121,000 running bales, half the previous week and 45 percent below the prior four-week average.

That cemented concerns about plunging demand, particularly from China, the world's largest textile market, after the U.S. Department of Agriculture raised its 2012/13 global inventory forecast by 3.4 percent to a record of 79.11 million 480-lb bales.

Thursday's report was the government's most bearish since the 1970s, said Sharon Johnson, a cotton specialist at Knight Futures in Atlanta, Georgia.

It was also the USDA's third monthly increase since the new marketing season started on Aug. 1 and the highest since records began in 1960. The new total would also represent a 14-percent jump from 2011/12's 69.56 million bales.

(Reporting By Josephine Mason; Editing by Bob Burgdorfer)

((josephine.mason@thomsonreuters.com))

Keywords: MARKETS COTTON/