(Recasts first paragraph, updates closing sugar/coffee prices)
* Small March sugar delivery of Central American expected
* Arabica coffee on track to end February up 41 pct
* Rains in Brazil ease worries over coffee, sugar crops
NEW YORK/LONDON, Feb 28 (Reuters) - ICE raw sugar futures sank on Friday in spread-related gyrations as the March contract expired at the end of the session, while arabica coffee neared a 17-month peak and marked its biggest monthly gain in nearly two decades.
Cocoa futures in New York and London advanced, buoyed by expectations of another year of supply deficit.
Both sugar and coffee posted huge gains this month as dry weather in Brazil stoked worries over crop damage in the top grower of both commodities.
Rains have picked up in recent days, easing worries.
The March raw sugar contract on ICE Futures U.S. slumped 0.97 cent, or 5.6 percent, to close at 16.47 cents a lb, before expiring at the end of the session. The move brought the March/May spread <SB-1=R> to a 0.97-cent discount, the biggest since December 2009.
The spot contract has retreated from this week's three-month high of 17.77 cents due to a lack of demand for delivery against the futures contract and concerns that the price recovery has been overstated.
The most-active May contract fell more marginally, closing down 0.41 cent, or 2.3 percent, at 17.66 cents a lb.
A short-covering scramble triggered by the dry weather has lifted spot prices 5.9 percent in February, the biggest up month since September 2013.
Traders expected a small delivery tonnage against Friday's expiry, and said Central American sugar was likely to feature.
"A weakening expiry spot month does not give a positive price outlook," said James Kirkup, head of sugar brokerage at ABN AMRO in London.
Dealers have referred to challenges finding markets for physical raw sugar due to substantial global surpluses, quoting a discount of 15-20 points to ICE March raw sugar futures.
May white sugar futures on Liffe ended down $7.20, or 1.5 percent, to close at $476.30 per tonne.
ARABICA SURGES 42 PERCENT IN FEBRUARY
May arabica coffee futures on ICE closed up 1 cent, or 0.6 percent, at $1.8030 per lb, as the momentum of a weather-driven rally slowed down because of rains in Brazil and an overbought condition.
The contract reached $1.8125, matching Tuesday's 17-month high.
"If the weather continues to improve, the best you can hope for is that production may stabilize," said Jack Scoville, a vice president for Price Futures Group in Chicago.
Arabica coffee ended February up 41.7 percent, its biggest monthly surge since June 1994, after traders cut their outlooks for Brazil's coffee crop due to a record hot January and worry that protracted dry conditions will hurt yields.
A rally of more than 50 percent so far in 2014 has lifted the second-month contract's 14-day relative strength index around 84, making it technically overbought for much of February.
Robusta coffee prices have gained alongside the New York market, with the benchmark up 12.8 percent this month.
Liffe May robusta coffee futures rose $9, or 0.4 percent, to settle at $2,043 per tonne.
In cocoa, New York and London futures saw a second straight month of gains after rallying over 20 percent last year on growing expectations of another deficit year and waves of speculator investment.
The International Cocoa Organization on Friday pegged the 13/14 global cocoa deficit at 115,000 tonnes compared with a deficit of 174,000 tonnes the previous season.
May futures on Liffe inched up 7 pounds, or 0.4 percent, to settle at 1,844 pounds a tonne.
Traders said the options expiry on Friday had temporarily distracted the market from fundamentals, which point to a global deficit in 2013/14.
May cocoa futures on ICE closed up $2, or 0.07 percent, at $2,957 a tonne.
(Reporting by Marcy Nicholson in New York; Editing by Grant McCool and Marguerita Choy)