* China 2012 cotton output seen down 4.2 pct on year
* State cotton reserves at the highest ever, storage capacity in problem
* 2011/2012 cotton consumption lower or at 9 million tonnes (Adds details, context)

BEIJING, Oct 9 (Reuters) - China is expected to harvest 6.9 million tonnes of cotton this year, a decline of 4.2 percent from a year ago, due to a smaller sowing area, an official from the country's top planning agency said in remarks published on Tuesday.

Chinese farmers have planted 4 percent less cropland this year, Zhang Xiaoqiang, deputy chief with the National Development and Reform Commission (NDRC) said at a conference, according to a transcript posted on industry website www.cottonchina.org.

China is the world's biggest cotton consumer.

Rising production costs have eaten into profits of cotton farmers despite the government raising purchase prices by 3 percent this year, Zhang told a national cotton conference.

Zhang also expected cotton consumption by the domestic textile industry in 2012/2013 to be flat compared to the previous year due to weak external demand amid the global economic slowdown.

China's cotton consumption in 2011/12 was about 9 million tonnes, or about 1 million tonnes lower than the previous year, as the textile industry slowed down exports. Mills are also increasing the amount of synthetic fibres they are using as a substitute for cotton, Zhang said.

The government has issued a total of 3.4 million tonnes of import quotas this year to help textile mills source cheap international supplies. Zhang said the commission will decide total quota volumes for 2013 when the domestic production and demand situation becomes clear.

Another commission official had earlier said Beijing will not issue more import quotas for the rest of the 2012 as the government is trying to stabilize domestic prices after the September harvest.

The International Cotton Advisory Council expects China will import 2.5 million tonnes of cotton in 2012/13, less than half the amount it did in the previous marketing year, which would help drive up stocks in the rest of the world by 16 percent.

Beijing has agreed to continue stockpiling domestic cotton this year after it purchased nearly 43 percent of last year's harvest. Zhang said as of August, stocks were at a record high and that storage was becoming a problem.