* Market digests news of China's import tariff plans

* Commercial selling caps gains

* Cotton has best week in four months

NEW YORK, Dec 13 (Reuters) - ICE cotton rose to seven-week highs on Friday, the biggest weekly gain in four months, as traders interpreted news of changes to China's import policy as a bullish sign for demand for fiber grown by the world's No. 1 exporter.

Traders digested a report overnight that authorities in China, the world's No. 1 textile market, cut its benchmark price for cotton imports next year, fueling hopes that the government will continue to issue import permits to mills.

Some traders had worried Beijing may curb its import quota next year as it starts to sell some of its huge stockpile of fiber. The state reserve started hoarding the material three years ago in a bid to help the country's farmers.

The move has boosted prices, hurting textile mills' margins.

While the new price will raise the cost of buying foreign cotton for mills, it was enough to allay concerns that the reserve sales would limit import demand.

"It makes it a little more expensive for importers, but does this mean China will come up with a sliding-scale quota?" said Peter Egli, director of risk management for British-based merchant Plexus Cotton Ltd, said.

"This gives people hope there will be more quotas."

The most-active March cotton contract on ICE Futures U.S. closed up 0.16 cent, or 0.2 percent, at 83.22 cents a lb.

Prices hit a fresh seven-week high of 83.42 cents for the second-month contract and took the market's gains for the week to 3 percent.

High-quality U.S. cotton has been in tight supply in recent weeks, and ICE stocks have fallen steeply during the December contract delivery period.

Technically, the market was on firmer footing above 82 cents, although some said it may be vulnerable to profit taking after this week's run-up, traders and analysts said.

Speculative investors placed fresh bullish bets in fiber in the week to Dec. 10 amid concerns about dwindling short-term supplies, the latest data showed on Friday.

Even so, gains were capped by commercial selling and slowing demand as high prices turn mills away from U.S. fiber toward other origins.

Business in the U.S. cash market has picked up this week as producers and merchants sold into the rally.

"The U.S. has priced itself out of the market," said Egli. (Reporting by Chris Prentice and writing by Josephine Mason; Editing by David Gregorio)