NEW YORK, Feb 22 (Reuters) - U.S. cotton futures slid to
their 7-cent downside limit early on Tuesday and stayed there
until closing, as sellers who could not get out of a tumbling
market last week ran for the exits once trading resumed at the
end of a three-day weekend, brokers said.

Most nearby contracts settled locked at their downside
limit of 7 cents a lb. Benchmark May cotton on ICE Futures U.S.
finished 7 cents, or 3.59 percent, lower at $1.8793.

March cotton fell even further, settling 4.61
percent, or 9.08 cent, lower at $1.8794 per lb.

The contract's delivery period began Tuesday, meaning that
7-cent trading limits do not apply. As a result, speculators
sold March futures down near a two-week low of $1.7720 in
overnight trade, before buying it back at the close.

Speculators were selling out of all nearby contracts, which
became inflated last week when a short squeeze drove prices to
successive all-time highs. Tuesday's rout was a follow-up to
speculative selling on Friday.

The decine was exacerbated by investors aversion to risk
brought on by protests in Libya, an oil exporting nation.

'With the stock market down, the grains down, you had every
reason for speculators to unload any risk trade they had on.

Because speculators are seeing their profits dissolve, with the
Libya unrest adding to that,' said Stevens.

Libyan leader Muammar Gaddafi, facing a nationwide revolt,
defiantly refused to step down, vowing to die in Libya as a
martyr while threatening to quash protests.

SHORT SQUEEZE

Most of last week, cotton soared to record highs as mills
had to cover short positions by Thursday night, after they had
waited too long to price short positions on March futures taken
out as a hedge against their unpriced cash contracts.

'Once the final buyers finished on Thursday night, there
was no one left to buy and the speculators all ran for the door
at the same time. Today was a continuation for speculators who
could not get out on Friday,' said Mike Stevens, independent
cotton analyst in Mandeville, Louisiana.

U.S. grain markets posted their biggest loss in more than
three months, with most falling by their daily limit as the
political upheaval in Libya triggered an investor stampede to
safer-haven markets.

Similarly, Wall Street suffered its biggest daily decline
since August, with investors dumping equities.

Despite cotton's steep 2-day slide, prices have been on an
uptrend since last August, driven by tight global supplies.

Analysts and brokers said they expect shortages to continue
amid strong demand and look for prices to find support once the
speculative build gets shaken out.

They pointed to a rise in U.S. consumer confidence in
February as indication of growing demand. Improved optimism
about the economy and income prospects, helped push the
sentiment reading to a three-year high.