GRAINS-Markets sag as snow brings relief to dry U.S. Plains

* Several inches of moisture fall in key wheat states

* USDA projects record large U.S. corn, soy harvests

* Federal Reserve rattles commodity traders

(Updates with U.S. trading, changes dateline from LONDON) CHICAGO, Feb 21 (Reuters) - U.S. grain futures fell on Thursday as crop weather improved and traders worried the U.S. Federal Reserve may scale back its stimulus program sooner than expected. Heavy snow in the U.S. Plains raised hopes for the harvest of hard red winter wheat, which is used to make bread. The winter storm was dumping several inches of moisture through dry parts of Oklahoma, Kansas and Nebraska. The United States is coming out of its worst drought in more than half a century, which has fuelled doubts that farmers in key states will be able to produce large yields. However, conditions are on the upswing for corn and soybean production, the U.S. Department of Agriculture's chief economist said at an annual conference in Washington D.C. The USDA forecast the nation's corn crop at 14.35 billion bushels, up 35 percent on the year, and soybean output at 3.405 billion bushels, up 13 percent. Season-average prices for 2013/14 are expected to tumble 33 percent to $4.80 per bushel for U.S. corn and 27 percent to $10.50 for soybean prices, according to the department. "We have the drought continuing to shrink, with the evidence of some big storms coming through," said Don Roose, president of U.S. Commodities. At the Chicago Board of Trade, March wheat lost 1.3 percent to $7.29 a bushe1 by 10 a.m. CST (1600 GMT). March corn dropped 1 percent to $6.93-1/2 a bushel. Commodities felt broad pressure from worries the U.S. central bank will scale back its stimulus program sooner than expected, which could dry up liquidity flows into a range of markets, traders said. Minutes from the Federal Reserve's last policy meeting, released on Wednesday, suggested the bank might have to slow or stop buying bonds before seeing the pickup in employment the programme is designed to deliver. "The government's sending a signal that their stimulus program is ending," Roose said. "We've got a hangover from that."

STRONG SOYBEANS Soybeans bucked the weaker trend in the grains amid strong export demand. March soybean added 0.5 percent to $14.89-3/4 a bushel. Private exporters struck deals to sell 130,450 tonnes of U.S. soybeans and 110,000 tonnes of U.S. soft red winter wheat to unknown destinations, with delivery of both sales split between this marketing year and next year, according to USDA.

The USDA will issue its weekly export sales report on Friday, one day later than usual due to the Presidents Day holiday on Monday.

Prices at 10:00 a.m. CST (1600 GMT)

LAST NET PCT YTD CHG CHG CHG CBOT corn 692.75 -7.75 -1.1% -0.8% CBOT soy 1489.00 6.25 0.4% 5.0% CBOT meal 438.00 4.40 1.0% 4.1% CBOT soyoil 51.50 -0.57 -1.1% 4.8% CBOT wheat 727.75 -10.75 -1.5% -6.5% CBOT rice 1592.00 -10.50 -0.7% 7.1% EU wheat 243.25 -0.50 -0.2% -2.8%US crude 93.11 -2.11 -2.2% 1.4% Dow Jones 13,870 -58 -0.4% 5.8% Gold 1583.14 20.85 1.3% -5.4% Euro/dollar 1.3224 -0.0056 -0.4% 0.2% Dollar Index 81.2140 0.1450 0.2% 1.8% Baltic Freight 737 2 0.3% 5.4%

(Additional reporting by Nigel Hunt and Natalie Huet in London, Naveen Thukral in Singapore and Gus Trompiz in Paris; Editing by William Hardy and Sofina Mirza-Reid)