* ICE inventories hit 250,606 bales, highest since July

* Greenback gains, adding weight to dollar-traded commodities

* U.S. weekly government export data due Friday

NEW YORK, Feb 19 (Reuters) - Cotton futures fell on Wednesday, as traders positioned themselves ahead of the expiration of the spot contract while exchange stocks, hitting seven-month highs, weighed on the market.

The most-active May cotton contract on ICE Futures U.S. slid 1.57 cents, or 1.8 percent, to settle at 87.91 cents a lb.

The spot March contract closed down 0.94 cent, or 1.1 percent, at 86.97 cents a lb as it headed toward its March 7 expiry.

The U.S. dollar index recovered the previous session's losses, adding weight as it makes dollar-traded commodities more expensive to holders of other currencies.

Certified stocks ticked up to 250,606 bales, up from about 34,100 bales at the start of the year and the highest level since July, exchange data compiled by Reuters showed.

"You've got a quarter million (exchange) stocks, and there doesn't seem to be much business going on," said Jobe Moss, a broker with MCM Inc in Lubbock, Texas.

Traders eyed weekly U.S. government export data due on Friday and many expected it to show weaker demand.

After the day's gyrations, the spot month's discount to the second month CT-1=R dropped to 0.94 cent a lb from 1.57 cents previously.

Total open interest fell to 171,549 lots on Tuesday, down by 2,180 contracts to the lowest level this year, ICE data showed on Wednesday.

The decrease in market interest arrived as prices rose, taken as evidence of short-covering ahead of the delivery period against the March contract.

The May contract dipped near support along the 14-day moving average it has traded above for the past seven sessions. (Reporting by Chris Prentice, editing by G Crosse)