U.S. cotton eases on spec selling; market eyes spreads

* Prices rise on the week for first time since early Sept.

* Traders hope Dec-March spread will widen as new crop lands

* Specs switch to net short for first time in two months

NEW YORK, Oct 5 (Reuters) - Cotton prices eased on Friday on speculative selling as investors braced for a bumper U.S. crop, although moves were exaggerated by extremely low volumes.

New York cotton for December delivery

settled down 0.83 percent at 71.49 cents per lb on ICE Futures U.S. Just over 10,000 lots had changed hands, more than half the average of the past 30 days.

The rally in the dollar after the U.S. unemployment rate in September dropped to its lowest level in almost four years and pressure on the grains market added to cotton's woes.

Even so, prices managed to eke out their first weekly gain in a month after a brief flurry of short covering by speculative investors earlier in the week. Hedge funds and other specs have increased their bearish bets on fibers ahead of the harvest.

In the week to Oct. 2, they switched to a net short position for the first time in two months, the latest data showed on Friday.

Traders continued to eye the narrow spread between December and March

contracts, hoping that conditions for stockpiling will improve in the coming weeks as the U.S. crop starts to arrive in exchange warehouses.

With physical demand for raw fibers extremely low and a record surplus expected in the marketing year to end-July 2013, there will be few homes for fibers other than in exchange warehouses.

"We anticipate that stock will come to the board. A massive amount will come. There's no demand," said Lou Barbera, cotton analyst at ICAP Cotton in New York.

An increase in certified inventory is crucial for easing the gap between the two delivery months. Narrowing the gap, in turn, will help merchants to cover the costs of holding onto material.

That spread has been tight around 0.84 cent in recent months because December prices have not dropped as much as many traders had expected, supported by a depletion of old crop stock. Inventory which rose 523 480-lb bales on Friday, is at multi-year lows below 10,000 bales.

But the spread needs to inflate to 2.5 cents per lb to be at full carry, meaning it covers the financing costs. That would mark a sea change for the market as it struggles under the weight of a massive global surplus.

Full carry has eluded the market since October 2009 before the market was gripped by a deficit and prices started their year-long rally to records above $2 last March.

(Reporting by Josephine Mason; Editing by Theodore d'Afflisio)