* Fiber posts limited gains after biggest 1-day loss since May

* Prices end the week little changed in light volume

* Exchange stocks fall below 600,000 bales

NEW YORK, July 12 (Reuters) - Cotton futures edged up on Friday, consolidating after falling the most in more than two months during the previous session on a U.S. Department of Agriculture (USDA) forecast that reinforced concerns about ballooning global inventories.

The most-active December cotton contract on ICE Futures U.S. edged down 0.34 cent, or 0.4 percent, to settle at 85.08 cents per lb in light trading volumes.

The gains were seen capped by the stronger U.S. dollar , which makes dollar-traded commodities more expensive to holders of other currencies.

Fiber finished the week little changed despite falling more than 2 percent following Thursday's USDA report.

"Yesterday was a knee-jerk, and today people are saying, 'do we really want to short December?'" said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.

A combination of rising open interest and falling prices during the previous session was seen as evidence of new short positions entering the market.

Prices had climbed more than 4 percent since bottoming out in late June, but the higher USDA forecasts for U.S. stocks and record global stocks stemmed the short-term rally.

China's expected share of the global stocks was unchanged, deflating the sense of continued tightening supplies outside of China.

The outlook has reinforced concern of global surplus that have overhung the market since a run-up in early 2011 prompted mills to seek lower-priced, synthetic alternatives.

But a Beijing stockpiling program has led to voracious demand for foreign cotton and supported global prices. The world's top textile market is expected to hold more than 60 percent of global reserves by the end of July 2014.

Merchants have said that tightening reserves outside of the world's top textile market helped lift front month prices to nearly 94 cents a lb in mid-March.

Concerns about supplies in Texas, the top-producing state in the United States, have also been supporting prices in recent weeks, as severely dry weather threatens crops.

Exchange stock levels fell below 600,000 bales on Thursday, according to the most recent ICE data, with more declines expected with the largest July ICE delivery in at least five years underway. (Reporting by Chris Prentice; Editing by Marguerita Choy)