* Production in top consumer China set to fall 5.1 pct
* U.S. weekly cotton export sales decline -USDA
* Traders await Friday's CFTC data for signs of investor buying
NEW YORK, Sept 26 (Reuters) - ICE cotton prices rose for a third day on Thursday after a report of falling production in top grower and consumer China reinforced concern about lower-than-expected output by some major producers, even as global inventories were forecast to climb.
The most-active December cotton contract on ICE Futures U.S. rose 0.82 cent, nearly 1 percent, to settle at 85.47 cents a lb.
It was the second month's biggest one-day gain in over a week, leaving cotton prices at the top end of the trading range they have been locked in since late August.
China is likely to produce 5.1 percent less fiber this year because of lower acreage and unfavorable weather, the China Cotton Association said.
"We knew they had planted a smaller crop and they've had adverse weather, but the market's hungry for news like that," said Keith Brown, president of commodity firm Keith Brown and Co in Moultrie, Georgia.
Traders said they expect the U.S. government to lower its forecast for China's output when the Agriculture Department publishes its monthly supply and demand report in two weeks.
The U.S. Department of Agriculture has reduced its production forecast for the United States, the world's top exporter, because of unfavorable weather.
Tightening U.S. supplies have also helped buoy the market.
Even so, world inventories are expected to reach a record of nearly 95 million 480-lb bales by July 31.
More than 60 percent of those stocks are expected to become part of China's reserves and are considered unavailable to the global marketplace.
This month, Beijing began its third year of a controversial stockpiling program, paying above global prices. The government policy has driven voracious demand for lower-priced, foreign cotton.
Weekly U.S. jobs claims data suggested a brighter employment outlook, easing some investor skittishness over Washington budget negotiations and lifting financial markets and the U.S. dollar.
Second-month prices are poised to end the quarter little changed after seeing their first quarterly loss in three quarters at the end of June.
Speculators have dialed back a large bullish stance and now hold one of their smallest net long positions in cotton futures and options since January.
The noncommercial began renewing a net long position in cotton, U.S. Commodity Futures Trading Commission (CFTC) data showed last week.
Dealers await CFTC data due on Friday to find out whether noncommercial dealers have continued to rebuild a bullish position.
Traders said the December contract's technical outlook may grow more bullish if it breaks above last week's high of 85.78 cents a lb.
A rally to August's peak of nearly 94 cents remained unlikely as high prices have damped mill buying, traders said.
That reduced demand was seen in weekly U.S. export sales of 66,500 running bales for the 2013/14 crop, down from both the previous week and the prior four-week average as China's buying fell. (Reporting by Chris Prentice; Editing by Grant McCool)
