* Fiber market selling continues following short-covering rally
* Worry over China demand overhangs market
* Stronger U.S. dollar keeps mill buying quiet
NEW YORK, June 26 (Reuters) - Cotton futures resumed their downtrend on Wednesday in a price correction following Tuesday's rally, under renewed pressure from limited mill buying.
The benchmark December cotton contract on ICE Futures U.S. closed down 1.25 cents, or 1.5 percent, at 83.70 cents.
Fiber was weighed down by both new short positions and long liquidation as selling resumed after the previous session's short-covering rally, which had stemmed a six-session slide, dealers said.
"We're giving back some of yesterday's ill-gotten gains," said Ron Lawson, a partner at commodity investment firm LOGIC Advisors. "We took a little bit of a bounce, maybe a dead-cat bounce."
Concern over the health of the Chinese economy and slowing demand from the world's largest textile market has weighed on prices. Talk of a potential credit crunch in China has heightened worry over weaker-than-expected economic data.
The December contract remained under technical pressure after falling below its 100-day moving average last week.
Mill buying has remained quiet into this week. U.S. cotton prices have been high enough to deter large purchases despite the six-session slide, dealers said.
"The dollar is very expensive right now, so the exchange rate is having a big effect," said a Turkish broker.
The U.S. dollar index has climbed against a basket of currencies, gaining in five of the last six sessions.
Dealers eyed an acreage report from the U.S. Department of Agriculture due on Friday which is expected to show an upward revision from the 10.0 million acres of planted area in the world's top exporter forecast in March.
Still, merchants said they were concerned about U.S. supply tightness heading into the new crop year beginning Aug. 1.
A large expected delivery in July would significantly cut exchange stock levels at the same time the United States is expecting a late crop following planting delays and the lowest carryover in three years.
As a result, the December contract on ICE moved into a steeper premium against the March 2014 ICE contract, widening to 1.60 cents a lb from 1.45 cents a lb previously. (Reporting by Chris Prentice; editing by Jim Marshall)
