* Market spooked by increase in global, U.S. output
* Losses limited by soaring grains market

NEW YORK, Aug 10 (Reuters) - Cotton sank almost 4 percent on
Friday, its largest daily fall in two months, after the U.S.
government raised its estimate for global cotton stockpiles to
fresh record highs, reinforcing fears about a growing surplus
and weakening demand.
The benchmark December cotton contract on ICE Futures
U.S. fell 3.9 percent to settle at 73.02 cents per lb, close to
its intraday low.
While the market retraced half the ground gained in the
seven days leading up to the report, prices were cushioned by a
renewed surge in grains prices, traders said.
Corn hit new all-time highs on Friday after the USDA slashed
its U.S. crop forecast as the worst drought in almost half a
century grips the U.S. corn belt.
The new ending stock estimate of 74.67 million 480-lb bales
would hit a new record, beating the previous high set last
season by 10 percent, according to U.S. Department of
Agriculture USDA records which began in 1960.
"You can't look at these numbers and think anything other
than it's bearish," said a source a textile mill, warning that
prices could fall back to as low as 60 cents a pound in the
coming weeks.
Analysts, traders and academics polled by Reuters ahead of
the report had, on average, predicted the authorities would trim
their ending stock estimate to around 70 million bales due to
expectations of lower crops from India, the world's
second-largest producer.
Estimates for India were cut alongside Brazil, where farmers
are expected to switch out of fibers and into soybeans due to
the soaring prices during their planting season later this year.
But those were more than offset by forecasts of plentiful
crops in China and the United States, the world's No. 1 and 3
producers.
The U.S. data was particularly bearish with the authorities
raising its stocks-to-use ratio for 2012/13 to 35.5 percent from
31 percent due to a lower abandonment rate of 14.5 percent.
That pushed the production estimate up more than 800,000
bales to 17.65 million bales.
The new forecast based on its first field surveys for this
season was in marked contrast to the 16.6 million bales
projected on average in a Reuters poll ahead of the report.
"Today's report continued to reflect the theme of weakening
global demand, with domestic use estimates cut again in China
and Pakistan," said Morgan Stanley analysts.