* Cotton gains more than 2 percent from last week's close
* Fiber recovers as speculators return to market - analyst
* Trade seen unwinding short positions in cotton
By Chris Prentice
NEW YORK, March 1 (Reuters) - Cotton gained on Friday to post its first weekly gain in four weeks, as renewed speculator buying and short-covering by commercial dealers had the fiber recover from losses earlier in the session.
The most-active May cotton contract on ICE Futures U.S. rose 0.11 cent, or 0.1 percent, to settle at 85.40 cents per pound.
Fiber gained about 2.4 percent since last Friday's close, and set a nine-month high of 85.97 cents a lb on Thursday.
It was the first weekly gain in a month. Cotton prices had posted slight weekly losses each of the previous three weeks, despite reaching its highest levels since May 2012.
"This is the bull market: it's a market that will trade lower during the day and then it finishes higher," said Ron Lawson, a partner at commodity investment firm LOGIC Advisors, who explained that dealers who hold short positions are drawn to cover their positions by the day's end,
Cotton had been down for much of the session on Friday, then gained as trading volumes picked up in the afternoon.
Prices rose nearly 3 percent in February, after gaining about 9.5 percent in January. The back-to-back monthly gains have left fiber up more than 12 percent so far in 2013.
The surge has come as speculators increased their bullish bets in the fiber to the highest levels since September 2010. Noncommercial dealers dialed those bullish bets back for the first time in six weeks during the week to Feb. 26, the same time period when cotton fell more than 4 percent from 85-cent highs.
Noncommercial dealers were seen taking profits after cotton climbed to 85.24 cents a lb on Wednesday, Feb. 20, contributing to that steep drop.
They have since returned to the market, helping push prices higher.
"Specs have added back a lot of longs," said Knight Capital's cotton specialist Sharon Johnson of the week's gains.
At the same time that speculators have been increasing their bullish bets on cotton contracts, the commercial end of the industry has been building its net short position in cotton futures and options.
The trade has begun to unwind that stance, lowering its net short position in the week to Feb. 26, according to Commodity Futures Trading Commission data.
The need to sell those short positions is setting cotton up for a short-covering rally, Lawson said.
Cotton's surge since the start of the year has come on the heels of two straight years of losses as lower-priced, synthetic alternatives eroded demand that caused an increase in global inventories. (Reporting By Chris Prentice; Editing by Bob Burgdorfer)
