Jan 24 (Reuters) - India's cotton prices are likely to remain steady as farmers are holding back supplies, reluctant to sell at lower prices, while an appreciating rupee kept exporters at bay, dealers and analysts said.

"Demand from yarn makers is good but it's not enough to push the prices up, and concerns are there that demand could get impacted at higher levels," said Arunbhai Dalal, a trader based in Rajkot, Gujarat, the largest producer of the fibre in India.

Cotton arrivals from the new crop in India have dropped 19.6 percent, the Cotton Corp. of India has said, as many farmers in a key state held back on expectations the government will raise support prices.

Farmers in the western state of Maharashtra, the country's second largest producer, are hoping the government will step in to support prices after they had almost halved since last March, while costs of seeds, fertilisers and fuel rose.

The partially convertible rupee hit a 10 week high in early trade on Tuesday.

"The strengthening of the rupee is making exporters nervous and they are staying away from market," said Dalal.

On Monday, the most traded Shankar-6 variety rose 300 rupees to 36,800 rupees per candy of 356 kg each, data from trade body Cotton Association of India showed.

Most traders and analysts expect fibre prices to stay between 36,000-37,000 rupees per candy level this week.

State-run Cotton Advisory Board estimates India's cotton harvesting in 2011/12 season to be at 34.5 million bales of 170 kg each, down from its earlier projection of 35.6 million bales

The government has estimated exports of nearly 8.4 million bales in the current cotton year, but some exporters feel the target is unlikely to be met in the wake of recent economic turmoil in the U.S. and Europe.