* Dow Jones, S&P hit record levels
* Brazil reduces cotton tariff to zero
* USDA ups forecast for record global cotton stocks
NEW YORK, April 10 (Reuters) - Cotton futures rose on Wednesday, thanks to broad gains in U.S. financial markets and news of a Brazilian tariff cut, though a U.S. Agriculture Department crop report projecting record global inventories deflated some of the day's upward momentum.
The most-active May cotton contract on ICE Futures U.S. settled up 0.73 cent, or 0.86 percent, at 85.37 cents a lb.
The Dow Jones Industrial average and the Standard & Poor's 500 Index both reached historic highs.
Cotton climbed as high as 86.53 cents a lb earlier in the session, pushed by the rising U.S. stock markets and by news Brazil would cut its cotton tariff, seen as an indication of tightening supplies in one of the world's two major Southern American exporters.
Supply concerns in Brazil have contributed to a sense of tightening global supplies outside of China, the world's No. 1 textile market, though the cash market has quieted during a recent price decline, dealers said.
Cotton pulled back from intraday highs following a monthly USDA report that revised upward expectations for global stocks by the end of the 2012/13 crop year through July.
"The report was better for the United States, but for the rest of the world it wasn't. They increased global consumption, but they also increased ending stocks," said John Flanagan, an analyst at Flanagan Trading Corp. in North Carolina.
The USDA increased production and export projections for the United States and also upped its forecast for global inventories, thanks to a rise in stocks in China.
Increased imports would offset sales from China's state-owned reserve, the USDA said in the report. Traders have said reserve sales would heavily pressure New York prices.
Beijing began building its reserves in 2011, paying above local prices to support farmers. The country is forecast to hold enough cotton in its stocks to feed fiber demand for more than a year.
The agency also increased its forecast for beginning stocks in India, the world's second-largest producer, which contributed to bearish sentiment in the market, Flanagan noted.
Volumes totaled about 41,000 lots compared with a 30-day average of about 24,000 lots, preliminary Thomson Reuters data showed.
Trading volumes have been heavy thanks to spreading, as positions are rolled forward out of the spot contract and into the July and December contracts.
July cotton closed up 0.87 cent, or 1 percent, at 87.48 cents a lb, and December cotton finished up 0.78 cent, or 0.9 percent, at 86.57 cents per lb.
Cotton closed down the previous four sessions, as investors were seen profit-taking. Open interest totaled 203,288 contracts on Tuesday, also down for four straight sessions, according to ICE data.
Speculators helped drive fiber's rally to a 1-year high of 93.93 cents a lb last month. Cotton surged about 18 percent during the first quarter of the year.
Prior to the recent rally, prices had fallen for two years, as lower-priced, synthetic alternatives eroded demand for the natural fiber, and global stockpiles grew. (Reporting by Chris Prentice; editing by Andrew Hay)
