* Cotton gains nearly 50 percent since start of rally

 * Mills buy despite steep rise, funds pile in as well

 By Rene Pastor

 NEW YORK, Sept 28 (Reuters) - Cotton futures finished
Tuesday at a 15-year peak for the second day in a row on a
steady influx of investment fund and mill buying which kept the
market poised to challenge all-time highs.

 For the sixth time in seven sessions, the market traded
over $1 a lb as index funds who believe fiber contracts will
test the all-time record of $1.172 bought cotton while mills
booked supplies regardless of the cost because they fear the
market is headed much higher.

 A further spark was provided by news that No. 2 world
cotton producer India will delay exports by a month until Nov.
1 and analysts say this could exacerbate the already tight
situation in cotton at a time of brisk demand. [ID:nSGE68R0LV]

 "Global cotton demand has not seen any (demand) destruction
from high prices," Sterling Smith, an analyst for brokers
Country Hedging Inc in Minnesota, said. "I think funds are
willing to press it higher until we see demand destruction."

 Keith Brown, president of commodity firm Keith Brown and Co
in Moultrie, Georgia, said index commodity funds are convinced
cotton will march higher.

 "We're trading money, not cotton," he said.

 ICE Futures U.S. key December cotton contract CTZ0
increased 1.31 cents to close at $1.0524 per lb. The all-time
high of $1.172 is just under 12 cents away.

 Total cotton volume stood at 22,397 lots at 2:55 p.m. (1855
GMT), over a third above the 30-day average of 16,035 lots,
according to preliminary Thomson Reuters data.

 Open interest in the cotton market hovered at levels near a
two-year high as it stood at 237,646 lots as of Monday, up from
the previous session's 236,866 lots.

 But the pace of the increase in open interest has slowed as
most investors appeared to have sat back to wait for clear
signs on the market's direction. Some are worried the steep
rally may be close to topping out.
 "Despite our bullish stance on cotton, we hesitate to call
the market much higher from current levels," said the commodity
outlook report by Standard Chartered, adding cotton contracts
are "approaching overbought levels."
 "We look for the market to enter a period of significant
price volatility, with prices likely to trade within a wide
margin of U.S. 90 cents to $1.20/lb until year-end," it said.
 Lou Barbera, an analyst at brokerage VIP Commodities, said
though that with prices trending higher, there is no reason for
index, hedge or long-only funds to dump cotton at this time.
 "If you're long, what's your reason for selling the
market?" he said.