Aug 23 (Reuters) - India's cotton prices are likely to rise this week on improvement in demand from yarn makers and on recent rains in northern states, which could delay the arrival of new crop.

" Yarn makers are making fresh buying from the market expecting strong orders from textile makers ahead of festive season," said Arunbhai Dalal, a trader based in the western state of Gujarat, the country's top producer of cotton.

On Monday, the most traded Shankar-6 variety rose 500 rupees to 38,000 rupees per candy of 356 kg, data from trade body Cotton Association of India showed.

Cotton prices, which touched a record high of 61,700 rupees per candy of 356 kg each on March, have declined by over 50 percent to touch 12 month low of 30,000 rupees per candy last month on low demand from mills particularly yarn makers.

Recent rains in northern states could delay the harvest of new season crop, which begins in October, by at least 15 days and it is also supporting prices, a trader based in Delhi said.

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.

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

India's cotton output estimate for 2010/11 has been revised to 32.5 million bales from the earlier 31.2 million bales.

In June, responding to a demand from traders and farmers the government had allowed shipment of an extra 1 million cotton bales of 170 kg each, over and above 5.5 million bales allowed earlier, following a 30 percent decline in domestic prices since March.