UPDATE 1-Cotton falls further as USDA ups stocks estimate again

(Adds details, background)

Oct 11 (Reuters) - Cotton prices extended losses in earlytrade on Thursday after the U.S. government raised its inventoryforecast for the season to end-July 2013 to a new record ofclose to 80 million 480-lb bales, reinforcing concerns aboutfalling demand from China, the world's largest textile market.

It was the third monthly increase by the U.S. Department ofAgriculture since the new marketing season started on Aug. 1.

The benchmark December futures were down 1.73 percentat 70.85 cents per lb by 9:27 a.m. EDT (1327 GMT), on track fortheir largest one-day fall in two weeks.

Prices fell as low as 70.41 cents immediately after thepublication of the USDA report, but recovered some lost groundafter hitting near-term technical supports. Before the report'srelease, prices were down 1.08 percent at 71.32 cents.

The government raised its estimate for 2012/13 world endingstocks by 2.6 million bales to 79.1 million bales due to acombination of sharply higher production and reducedconsumption.

While the report was bearish overall, prices were cushionedby a rallying grains market, said Sharon Johnson, a cottonspecialist at Knight Futures in Atlanta, Georgia.

"(Grains) prices are moving higher and may provide someindirect support for cotton. At the very least, I look for atest of the 70.22 (cent) recent low basis December," she said.

In the USDA report, there was some relief for traders andgrowers who fear that Chinese mills will cut their buying evenfurther. The report said a large portion of the drop in Chinesedemand was offset by an increase from other major spinningcountries, including India, Turkey, Pakistan, Indonesia, Taiwanand Vietnam.

Those countries have access to cheaper raw cotton than theirChinese counterparts and have increased their buying, it said.

(Reporting by Josephine Mason in London; Editing by Dale Hudsonand John Wallace)

((Josephine.Mason@thomsonreuters.com)(+1 646 223 8925))