Aug 9 (Reuters) - Indian cotton prices are expected to remain stable this week on higher stocks and lesser demand from exporters and yarn makers, though lower old-crop arrivals in the spot markets could prevent a sharp fall, traders and analysts said.

"Prices are likely to remain stable as most of the exporters are already sitting over huge stocks and demand from yarn makers is still low," said Arunbhai Dalal, a trader based in Rajkot, Gujarat.

There will not be much movement in prices as only two months are left in new crop arrivals to begin and most of the traders are adopting wait and watch policy, Dalal said.

India's cotton output is set for a second successive record harvest in 2011/12, up about 10 percent over last year's 32.5 million bales, a Reuters poll showed.

On Monday, the most traded Shankar-6 variety fell 500 rupees to 34,000 rupees per candy of 356 kg, data from trade body Cotton Association of India, showed.

The fibre prices rose by more than 2,000 rupees per candy in the last week on the government's decision to remove quantitative restrictions on cotton export for 2010/11 season.

India, the world's second largest grower and exporter, allowed unrestricted exports for the remainder of the current season due to abundant availability of stocks.

"Prices are likely to stabilise at that level," said Alok Industries CFO Sunil Khandelwal.

India could export an additional 255,000 tonnes of cotton in these two months, traders said.

Cotton output in India has been revised to 32.5 million bales for 2010/11 year against 31.2 million bales estimated earlier.

In June government allowed shipment of extra 1 million cotton bales of 170 kg each on demand from traders and farmers, following a 30 percent decline in domestic prices since March.

It had already allowed shipment of 5.5 million bales in October last year.

Cotton acreage in India is likely to rise up to 15 percent in the 2011/12 season as farmers, lured by high prices in the current season, might plant the natural fibre in more areas.