Oct 20 (Reuters) -ICE cotton futures fell 3% on Friday as risk-off sentiment in wider financial markets seeped into the natural fiber, while prospects of lower demand from key buyer China continued to dim outlook.

* Cotton contract for December CTZ3 was down 1.88 cents, or 2.2%, at 82.39 cents per lb by 1:24 p.m. ET (1724 GMT) after falling as much as 3% earlier in the session. The contract is down about 4% for the week.

* Wall Street's main indexes dropped as U.S. Treasury yields hovered near multi-year highs following hawkish remarks by Federal Reserve Chair Jerome Powell, while the Middle East conflict kept investors jittery. .N

* Israel levelled a northern Gaza district after giving families a half-hour warning to escape.

* Sentiment in cotton is being impacted by wider market sentiment amid the Middle East tensions, it's really a matter of macro economics, said Kansas-based commodity analyst Sid Love.

* The U.S. Department of Agriculture's weekly sales report on Thursday showed net sales of 71,300 running bales of cotton for 2023/2024 were down 36% from the prior 4-week average and exports were down 22% from the prior 4-week average.

* A wobbly Chinese economy and the intrusion of cheaper Brazilian cotton are among the factors contributing to the liquidation in the cotton market, said Keith Brown, principal at cotton broker Keith Brown and Co in Georgia.

* Brazil is on track for record cotton shipments in the 2023/24 commercial year, an exporter group said last month,citing a large crop and likely record sales in September.

* China released a mixed batch of economic data on Oct. 13 showing a slump in exports and imports was gradually easing, but lingering deflationary pressures underlined the challenges policymakers face in trying to engineer a stronger economic recovery.

Reporting by Sherin Elizabeth Varghese in Bengaluru; Editing by Shailesh Kuber