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

(Adds details, background)

Oct 11 (Reuters) - Cotton prices extended losses in early trade on Thursday after the U.S. government raised its inventory forecast for the season to end-July 2013 to a new record of close to 80 million 480-lb bales, reinforcing concerns about falling demand from China, the world's largest textile market.

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

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

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

The government raised its estimate for 2012/13 world ending stocks by 2.6 million bales to 79.1 million bales due to a combination of sharply higher production and reduced consumption.

While the report was bearish overall, prices were cushioned by a rallying grains market, said Sharon Johnson, a cotton specialist at Knight Futures in Atlanta, Georgia.

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

In the USDA report, there was some relief for traders and growers who fear that Chinese mills will cut their buying even further. The report said a large portion of the drop in Chinese demand was offset by an increase from other major spinning countries, including India, Turkey, Pakistan, Indonesia, Taiwan and Vietnam.

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

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

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