SOFTS-ICE coffee hits 33-month low, sugar falls sharply

* Sugar falls sharply as fund net short position shrinks

* Arabica coffee sets new low but downside seen limited

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LONDON, March 18 (Reuters) - Arabica coffee futures on ICE slid to a 33-month low on Monday while raw sugar and cocoa also fell as commodity markets retreated in the face of heightened concern about the economic crisis in the euro zone.

The surprise decision by euro zone leaders to part-fund a bailout of Cyprus by taxing bank deposits sent shockwaves through financial markets on Monday, with shares and the bonds of struggling euro zone governments tumbling.

ICE May arabica coffee fell 1.45 cent or 1.05 percent to $1.3605 per lb by 1304 GMT after touching $1.3560, the lowest level for the second month since June 2010.

Commerzbank analyst Carsten Fritsch said losses in coffee were driven by the general sell-off in commodity markets with the extent of the setback "muted" compared to oil or metals.

"I think the price level is quite low already so there should be limited downside," he said.

Dealers said the continued build in ICE certified coffee was keeping the market on the defensive.

The market has struggled to absorb last year's large crop in top grower Brazil while the outlook for next harvest also appears generally favourable.

Sales of Brazil's 2012/13 coffee crop were still well behind the prior season with 71 percent of the beans sold by February 28, down from 87 percent a year earlier, agriculture analysts Safras & Mercado said on Friday.

May robusta coffee futures on Liffe were $8, or 0.4 percent lower at $2,184 a tonne.

Speculators increased a net long position in robusta coffee futures and options on NYSE Liffe in the week to March 12, exchange data showed on Monday.

SUGAR SETBACK

Raw sugar futures on ICE fell more sharply with a decline in the speculative short position also contributing to the setback.

May raw sugar futures were down 0.56 cents or 3.0 percent at 18.32 cents a lb.

Speculators cut their net short position in raw sugar contracts on ICE in the week ended March 12, U.S. Commodity Futures Trading Commission data showed.

"The sell-off this morning is largely in response to the COT (Commitments of Traders) report and the fact that we may have seen the last of the fund buying," one sugar analyst said.

May white sugar on Liffe was off $10.70 or 2.0 percent at $528.70 a tonne.

Iraq has bought 71,750 tonnes of white sugar from the United Arab Emirates in a tender for nominal 50,000 tonnes, which closed on March 5, a trade ministry statement said on Monday.

Cocoa futures on ICE also joined the retreat with May off $22 or 1.0 percent at $2,093 a tonne.

Dealers said the market continued to keep a close watch on the outlook for mid-crops in West Africa.

Ivory Coast is unlikely to harvest a bumper cocoa crop this year as dry and hot weather hampers the development of the upcoming mid-crop in the world's biggest producer, farmers and exporters said on Friday.

(Additional reporting by David Brough, Editing by Alison Birrane)