* Cotton breaches 100-day MA at 77.07 cents
* Prices hit highest level since mid-May
* Concerns about surplus, producer selling may limit gains

NEW YORK, Aug 21 (Reuters) - Cotton prices rallied over 3
percent to three-month highs and flirted with bull territory on
Tuesday as technical buy signals offset concerns about a record
surplus and weak demand.
The benchmark December cotton contract on ICE Futures
U.S. rose for a third day to settle at 77.3 cents per lb, up 3.3
percent.
Gains accelerated after fiber prices breached a key
technical resistance at the 100-day moving average at 77.07
cents per lb. Fibers haven't crossed that level since early
March when the market was plunging from highs close to $1 per lb
which were hit in February.
Tuesday's solid close leaves the market tantalizingly close
to a bull territory, which is typically marked by growth of 20
percent or more.
Prices have risen 19.5 percent since the start of June when
the market languished under 65 cents, boosted by concerns about
poor crops from India, the world's second-largest producer,
where planting has been hampered by weak monsoon rains.
Sentiment has also improved as traders expect farmers to
ditch cotton next year in favor of higher-priced grains. That
would help to eat into the market's massive surplus, they hope.
Soybeans prices hit fresh records on Tuesday as the worst
drought in over half a century continued to wither crops across
the U.S. corn belt.
In the immediate term though, inventories are at all-time
highs and demand remains sluggish due to the weak global economy
and as mills switch to lower-priced man-made materials.
Those factors could limit gains, particularly if producers
start selling to take advantage of these higher prices.
"I think it's a combination of grains and the fund
community. It looks like producer selling and hedging above 77
cents," said one trader.
Volumes also showed a sudden pick-up, rising to 20,220 lots,
which was double the previous four trading days. It was just
above the 250-day but slightly below the 30-day average.
Prices were also boosted by optimism across broader
commodity and financial markets that the European Central Bank
will move to cut borrowing costs for debt-laden Spain and Italy,
in a further bid to resolve the four-year euro-zone debt crisis.
The euro hit seven-week highs on hope of action next month.