* 'Panic trading' lifted prices to two-year high -economist
* China announces plans to cut reserve sales price
* Dealers eye USDA 2013/14 planting intentions report
NEW YORK, March 28 (Reuters) - ICE cotton rallied on Friday, eking out a third straight weekly gain after a string of volatile trading sessions amid worries over tight U.S. supplies, trade short-covering, and renewed speculator interest.
The benchmark May cotton contract on ICE Futures U.S. closed up 1.18 cents, or 1.3 percent, at 93.74 cents a lb.
"Panic trading" brought prices to this week's two-year high of 97.35 cents a lb, Mississippi-based economist Dr. O. A. Cleveland said in a market note.
"One is tempted to call this a roller-coaster, but that phrase does not conjure up enough drama for the current market."
Expectations of tight nearby supplies in the United States, the world's top exporter, grew after a U.S. Agriculture Department (USDA) report on Tuesday that forecast the current crop may be smaller than previously expected.
Meanwhile, speculators added to a net long position in the week ended March 25, U.S. government data showed on Friday.
China said it is cutting the price of domestic cotton being sold from its state reserves in a bid to speed up auctions and whittle down its ballooning stocks.
The move is tied to import quotas, raising hopes that Chinese buyers will continue to buy foreign cotton and provide a soft landing for global prices, which have been expected to be hit hard by the overhaul of Beijing's stockpiling program.
China began building its reserves in 2011, paying above global prices and driving voracious demand for imports.
Global inventories are expected to reach a record high by the end of July after back-to-back surplus seasons, with about 10 million tonnes held in China's state reserves.
A U.S. weekly export sales on Thursday beat expectations and lifted prices, lending support to worries over tight U.S. supplies.
The week's volatility stoked worries among merchants and buyers still reeling from the volatility of three years ago that lifted prices to historic highs above $2 a pound and dropped them nearly as sharply before the year was out.
The price swings prompted waves of contract defaults and dented cotton demand as mills opted for lower-priced, manmade fibers.
Dealers eyed a plantings report from the U.S. government due next week that is expected to shed light on the size of the 2013/14 crop. Traders have said that cotton will gain back acres from corn due to the price rally. (Reporting by Chris Prentice; Editing by Peter Galloway)
