(Reuters) - India will now ban fresh cotton exports and allow only quantities already registered but not shipped, its trade secretary said on Monday, as the world's No.2 producer continued to flip-flop with its trade policy, fuelling market uncertainty.

The trade minister said on Sunday the government would lift a surprise ban on cotton exports imposed on March 5, after influential Farm Minister Sharad Pawar, a coalition ally, opposed the move and asked Prime Minister Manmohan Singh to revoke the ban.

China, India's biggest customer, also criticised the move.

"No new registration certificates will be issued," Rahul Kullar told reporters on Monday. The controversial ban comes at a time when the global market for cotton is already over-supplied.

The stoppage was triggered by concerns about domestic consumption and availability, the government had said.

Khullar said a panel of ministers is likely to review the ban on exports - which had already hit record levels of 9.5 million bales - in two weeks.

Traders and analysts said the latest confusion would further damage the reputation of India as a credible, long-term supplier of commodities.

"The agricultural market remains very much at the mercy of government policies ... the ban was a surprise and as a result of that prices rose significantly on that particular day," said Luke Mathews, commodities strategist at Commonwealth Bank of Australia.

The latest decisions mean exporters can ship out 2.5 million bales committed to overseas sales before the government ban and avoid any defaults.

That means India would already be exporting a record 12 million bales of the fibre in 2011/12, 54 percent more than the previous year. Exporters had already been saddled with huge stocks last year after similar government dithering which hurt its image.

Traders were dismissive of this, however.

"It's as good as banning cotton exports. It will not benefit anyone," said Arvind Patel, vice-president of the Saurashtra Ginners Association.

INDIA WAVERS

The moves prompted calls for India to be more reliable.

"Consistent policy helps create increased reliability and we wish that a very consistent policy is followed and free and unrestricted flow of cotton export is allowed," said Dhiren N. Sheth, president of Cotton Association of India.

The benchmark May futures contract on the ICE in the U.S. fell as low as 88 cents a pound on Monday, its weakest since March 2, on the prospect of higher global production and confusion over India's decision to ban exports.

The U.S. Agriculture Department has raised the world's 2011/12 cotton output estimates to 123.64 million (480-lb) bales, from 123.34 million.

Cotton ended 2011 as the worst-performing commodity of the year, falling 37 percent from 2010 after record prices had boosted output and decimated demand, while a shaky global economy scared off investors.

If India's ban persists, major cotton exporter Australia is poised to benefit the most, analysts said.

India's domestic cotton contract on the Multi Commodity exchange fell 0.41 percent to 17,030 rupees per bale of 170 kg each in choppy trade with low volumes.

With no prospect of fresh exports for at least two weeks, there will be no fresh buying from the local market, traders said. Textile mills are also likely to hold back, waiting for domestic prices to fall, said Arunbhai Dalal, a trader from Rajkot in the western state of Gujarat.

Raw cotton prices have fallen by over 1,000 rupees to less than 3,000 rupees per 100 kg since the government first banned exports a week ago, traders say.

As the government yo-yos on cotton export policy, trade analysts see this as yet another sign of the Congress-led ruling coalition's indecisiveness, especially after its drubbing in recent state elections.

The opposition Bharatiya Janata Bharatiya Party (BJP), which rules Gujarat state, termed the ban as "unilateral" and requested the government to lift the restriction to avoid a free fall in local prices.

"Today, I spoke to ... Sharad Pawar, who has promised that the ban will be lifted," BJP President M. Venkaiah Naidu said in a statement.