* Spot ICE cotton plunges to 6-1/2-month low of 81.33 cts/lb

* July/December spread narrows sharply as ICE delivery begins

* Exchange inventories climb to 11-month highs -ICE data (Adds closing prices, market background, details, daily limit change)

NEW YORK, June 24 (Reuters) - Spot cotton futures plummeted over 7 percent on Tuesday in the biggest daily rout since the historic months-long exodus in 2011 as traders dumped long positions as the July contract entered delivery period and unwilling buyers clung to the sidelines.

Traders said they were mystified by the size of the fall, although volumes traded in July were tiny. Some cited rumours that one big long had gotten caught out after a customer cancelled a big purchase order.

Others said a relentless build in inventory kept pressure on price and chased the longs out of the market.

Some investors had bought futures betting on higher prices as U.S. supplies tightened ahead of the next harvest in the fall. Talk that a significant portion of visible stock had been pledged for sale reinforced the perception of low supplies.

"This has caught a lot of people off guard," said Ron Lawson, a partner at commodity investment firm Logic Advisors in California. "There are no buyers left. It's a race to the bottom."

The dramatic drop over the past two sessions mark the fourth straight year of wild price gyrations amid the expiry of July that has already captured the attention of regulators.

U.S. government regulators have upped their oversight of the cotton market following an alleged squeeze in May-July 2011. That prompted a class-action lawsuit.

The spot July contract on ICE Futures U.S. dropped as much as 7.1 percent to 6-1/2-month low of 81.33 cents a lb, with daily prices limits removed due to the delivery period.

The contract closed down 5.71 cents, or 6.5 percent, at 81.81 cents a lb on the first day of the notice period for cash delivery against the contract ahead of its July 9 expiry.

It was the biggest daily drop for the spot contract since early July 2011 when prices slumped from highs above $2 a lb after worries over short supplies proved overdone.

After market closed on Tuesday, the exchange said the daily trading limit for all contracts except July will revert to 3 cents per lb.

For many, the selling was logical given July's premium over December, the most-active contract that represents the next season's harvest.

Investors needed to exit July positions or face holding cotton that is worth less once the spot contract expires. Spot was still at a premium of 5.32 cents a lb on Tuesday, but that was down from as much as 13.96 cents a lb last week.

The most-active December contract finished down 1.19 cents, or 1.5 percent, at 76.49 cents a lb.

Inventories in the United States, the world's top exporter, have been tightening after farmers harvested less than initially forecast and year-to-date exports have beat expectations.

The situation has left nearby prices at a steep premium for months, especially amid rising expectations for a sharp increase in U.S. output in the 2014/15 crop year that begins on Aug. 1.

Open interest data revealed the extent of the liquidation in the July contract. Total market open interest has shriveled to the lowest since late 2011, dropping to 145,800 lots on Monday from 157,280 lots previously, ICE data showed.

The vast majority of the 11,480-lot drop was in the July contract. Just over 3,000 lots, equating to 300,000 bales, remain on the board.

That would be a relatively big delivery, potentially depleting certified stocks. Holders of cotton pledged to give up just 10,100 bales in the July expiry in the first delivery notice on Monday night.

The delivery notice period for the cotton No. 2 contract lasts for about three weeks.

Newedge USA LLC, Louis Dreyfus Commodities unit Term Commodities, and ADM Investor Services had so far issued notices to receive bales, according to the most recent ICE data.

Stocks continued to rise, hitting 439,198 bales on Monday, up from 436,979 previously, exchange data showed on Tuesday. (Reporting by Chris Prentice; Editing by James Dalgleish and Lisa Shumaker)