SOFTS-ICE sugar turns higher after setting 2-1/2 year low

* Larger CS Brazil cane crop expected this year

* Reuters poll sees higher coffee prices by year-end

* Costa Rica declares emergency to tackle coffee fungus

(Adds quotes, updates prices)

LONDON, Jan 23 (Reuters) - Raw sugar futures on ICE turned higher on Wednesday after earlier dipping to the lowest levels in around 2-1/2 years while arabica coffee advanced but cocoa suffered a setback.

Dealers said the prospect of a large cane crop in top producer Brazil had heightened concerns about excess sugar supplies and helped to drive prices to new lows but the market remained susceptible to short-term rallies.

Technical indicators suggesting the market is heavily oversold and a large net short position held by speculators had prompted some dealers to expect a short-term bounce.

"Whilst remaining overall bearish in the medium-term, we are mindful of the market being oversold, of physical differentials firming and of a substantial if not record short position in the COT (Commitment of Traders) report," Nick Penney of Sucden Financial said in a market note.

"This could lead to a substantial short term rally."

March raw sugar futures on ICE stood 0.13 cent or 0.7 percent higher at 18.25 cents a lb at 1549 GMT after earlier falling to 18.06 cents, the lowest level for the front-month since August 2010.

Dealers said a favourable crop outlook in Brazil added to bearish sentiment on fundamentals with the market already struggling to absorb a substantial global surplus in 2012/13.

The scope for further losses was, however, seen limited.

"We believe sugar prices are now hovering at the marginal cost of production which implies current levels are a good support," Standard Chartered analyst Abah Ofon said in a research note on Wednesday.

Brazil's center-south cane belt should produce around 585 million tonnes of sugar cane in the 2013/14 season, or roughly 10 percent more than in the soon-to-end 2012/13 crop year, after intensive replacement of less productive plants, the head of cane industry association Unica said in an interview on Tuesday.

A switch in the use of cane towards ethanol in Brazil could, however, help to underpin prices with the government expected to increase the mandatory blend of ethanol in gasoline to 25 percent from 20 percent later this year.

"News like Unica expecting a record large cane harvest is making prices go down at the moment but the other side is there will be a higher share of sugar cane in ethanol production," Commerzbank analyst Michaela Kuhl said.

"We expect the government to increase the share of ethanol in gasoline back to 25 percent around summertime," she said, adding she believed the current prices did not fully reflect the anticipated switch in cane from sugar into ethanol production.

A slump in cane output caused the government to reduce the mandatory blend of ethanol in gasoline to 20 percent from 25 percent in 2011.

March white sugar on Liffe rose $1.40 or 0.3 percent to $484.60 per tonne. The contract dipped to $480.80 earlier in the session, the lowest level for the front month since June 2010.

COSTA RICA EMERGENCY

Arabica coffee futures on ICE were higher with the market regaining some ground after the prior session's steep setback.

Dealers said the market remained underpinned by concerns about the spread of a tree-killing fungus known as roya in Central America, producer of a fifth of the world's arabica.

Costa Rica on Tuesday declared an emergency to tackle the spread of a coffee fungus that has already devastated Central American producers and looks set to destroy about 12 percent of Costa Rica's planted coffee in the upcoming 2013/14 harvest.

"We think that prices are too low because although the (supply) situation is relatively good, it is not as good as the market expects especially if these roya problems really materialise," Kuhl of Commerzbank said.

"It (roya) seems to be quite a drastic problem at the moment and might be a long-term problem."

Some dealers, however, said the market may have overreacted to the reports.

"It has probably been overstated by the Central American producers because it's in their interest to overstate it," one London dealer said.

March arabica coffee futures on ICE rose 2.0 cents or 1.35 percent to $1.5060 per lb.

A Reuters poll on Wednesday projected higher prices for arabica coffee by the end of the year with the market clawing back some of last year's steep losses.

March robusta coffee futures on Liffe rose $23 or 1.2 percent to $1,962 a tonne.

Cocoa futures were lower with March futures on ICE off $10 or 0.45 percent to $2,203 per tonne, weighed partly by bearish technical indicators.

New York March cocoa is expected to test a support at $2,202 per tonne, a break below, which will open the way towards $2,119, Reuters market analyst Wang Tao said.

May cocoa futures on Liffe fell 6 pounds or 0.4 percent to 1,442 pounds a tonne.

(Additional reporting by Sarah McFarlane; Editing by Alison Birrane)