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SOFTS-Coffee retreats from 2-year high, cocoa sets 2-1/2 year peak

* March Liffe cocoa expiry sees 37,350 tonnes tendered

* Sugar back on defensive after Brazil-driven rally

(Adds quotes, updates prices)

LONDON, March 17 (Reuters) - Arabica coffee futures on ICE were lower on Monday, extending a retreat from last week's two-year high with the focus remaining on the extent of damage to Brazil's crop prospects from dry weather earlier this year.

Raw sugar futures also fell while cocoa climbed to a fresh 2-1/2 year high, supported by rising demand and the prospect of a second consecutive global deficit in 2013/14.

Romain Lathiere, head of dealing at Diapason Commodities Management said the arabica market needed to retrace to some extent after rising as much as 85 percent since the start of the year with the price outlook likely to remain uncertain until there is more clarity about the prospects for Brazil's crop.

"The retracement we saw on Friday and again today looks to me more like profit-taking than anything else," he said.

"We still don't have precise figures on how the next crop will be affected by the drought we saw in Brazil," Lathiere added, noting a clearer picture may emerge in the next month.

May arabica coffee futures on ICE were down 2.35 cents or 1.2 percent at $1.9605 per lb by 1539 GMT after earlier dipping to a low of $1.8880.

The second month peaked at $2.0975 on Wednesday, its highest since February 2012, after concerns that dry weather could reduce production in Brazil both this year and in 2015.

Dealers said the rise in prices had prompted some producer selling while rains in key growing regions this month and the prospect of further showers over the next two weeks may also have helped to stall the rally.

"If there should turn out to be sufficient rain to prevent further crop shortfalls, the rally is likely to come to an end," Commerzbank said in a market note.

The biggest arabica coffee rally in two decades is beginning to force smaller-brand roasters to raise wholesale prices, even as top names such as Starbucks resist.

May robusta coffee futures on Liffe were down $10 or 0.5 percent at $2,165 a tonne. The second position peaked at $2,218 on Wednesday, a 17-month high.

SUGAR SLIPS

Raw sugar futures also fell with the market back on the defensive following a rally linked to concerns that dry weather in Brazil could also curb production of the sweetener.

May raw sugar futures on ICE were down 0.08 cent, or 0.5 percent, at 17.17 cents a lb.

The contract has fallen back after rising to a peak of 18.47 cents on March 6 and is now down about 3.5 percent so far this month as the market's focus has returned to excess supplies.

"Prices now appear set to follow their typical seasonal sell-off in March, April and May," analyst Luke Mathews of Commonwealth Bank of Australia said.

"Data analysis shows that raw sugar prices have declined in the month of March for each of the past seven years, with an average losing margin of 13 percent."

Liffe May white sugar futures were down $1.30 or 0.3 percent at $455.80 per tonne.

Cocoa futures on ICE were higher with May up $39 or 1.3 percent at $3,031 after setting a 2-1/2-year high of $3,039.

Kash Kamal, research analyst with Sucden Financial said the market may now test resistance around $3,040.

"Moves above this levels may be limited however, as profit taking on any approach towards $3,030-40 limits upside potential," Kamal said in a market update.

May cocoa on Liffe was up 20 pounds or 1.1 percent at 1,898 pounds a tonne.

Dealers noted there was a modest delivery of 37,350 tonnes against the March Liffe contract which expired on Friday.

(Reporting by Nigel Hunt; editing by Jason Neely)