* U.S. cotton hits record at $1.198/lb, then tanks

 * China's cotton futures rally despite warning

 * Analysts see "key reversal" in U.S. cotton market
 (Adds quotes, writes through, changes dateline)

 By Rene Pastor

 NEW YORK, Oct 15 (Reuters) - U.S. cotton futures sank from
a record peak on Friday as speculative funds took profits, but
analysts said the market's three-month rally could resume next
week if No. 1 consumer China sees the drop as a cue to buy.

 Cotton prices on ICE Futures U.S. and China's Zhengzhou
Commodity Exchange have soared into uncharted territory, stoked
by strong demand and tight global supplies.

 A fall in the dollar to an eight-week low galvanized the
rally earlier on Friday but a recovery later by the greenback
helped to blunt cotton's advance. [FRX/]

 The key December U.S. cotton contract CTZ0 hit an
all-time peak of $1.198 per lb within minutes of opening at
0100 GMT but it could go no higher, closing down by its
5.00-cent daily limit at $1.0987 per lb.

 The key May 2011 cotton futures CCFK1 on the Zhengzhou
Commodity Exchange rose 275 to finish at 24,305 yuan per tonne,
having hit a lifetime peak of 24,680 in Friday's session.

 "I think (we saw) a naturally occurring correction," Ron
Lawson, cotton expert at brokerage logicadvisors.com in Sonoma,
California, said.

 "All the symptoms we look for in terms of a top, we're
seeing today," said Sharon Johnson, cotton specialist for First
Capitol Group financial advisors in Atlanta, Georgia, referring
to the market's rapid drop from the record high.

 Volume traded hit around 33,950 lots, 65 percent above the
30-day average at 20,567 lots, preliminary Thomson Reuters data
showed.

 Lawson said the next market move would be dictated by
China, the world's No. 1 cotton producer and consumer whose
weather-plagued crop and large import needs fired the surge in
July.

 Chinese mills have been leading the buying in cotton and
may see the fall as an opportunity to book new orders.

 "If this decline prompts China to be a big buyer, then we
won't go down on Monday," Lawson said.

 Rabobank Agri Commodity Markets Research said in a note
that U.S. cotton prices would be well supported because of
tight supplies, an intensifying battle for acreage in the 2011
spring planting season, and a weak-dollar environment.

 "In contrast to the price rally of March 2008, Rabobank
believes this rally is more sustainable," it said.

 Luke Mathews, commodity strategist at Commonwealth Bank of
Australia, said: "We have the global supplies at the tightest
level since 1994/95 when the previous record was set and it
doesn't appear to my mind that the supply issue is going to be
rectified soon even with a larger U.S. cotton crop."

 Traders said investors felt the time was right to book
profits on lucrative long positions in cotton, sending the
market down on Friday.

 "All the buyers started to take profits," Lou Barbera of
commodity brokerage VIP Commodities said. "There are still a
lot of longs (out there) that will take profits."

 Technical analysts said the Chinese and U.S. cotton markets
were overbought and due a downward correction unseen since
their rally began in July. U.S. cotton values alone have
climbed nearly 65 percent from July to their Friday top.

 <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

 Take a Look on cotton's rally              [ID:nN20273787]

 Factbox-Major factors in cotton rally      [ID:nN15196254]

 Timeline on U.S. cotton trading            [ID:nN22245547]

 For a graphic on the world's main consumers and exporters:

 here

 For a graphic on China's consumption and production:

 here

 For a graph on U.S. and Chinese cotton prices and RSI
readings:
here

 For a graphic on cotton prices hitting all-time high:

 here

 For a graphic on cotton ending limit-down:
here

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

 Analysts said the bullish fundamentals were underscored by
news from the China Cotton Association that cotton imports in
September totaled 201,000 tonnes, up 97 percent from a year
earlier. [ID:nBJB003969]

 "The import demand of the world's biggest cotton-consuming
country (China) will rise ... Therefore, cotton prices remain
well supported for the time being despite a market supply
expansion in the U.S.," Commerzbank said in a market note.

 LOWER CHINESE CROP

 The association trimmed its estimate of China's cotton
output this year to 6.64 million tonnes, the second cut in its
forecast in just over two weeks.

 U.S. cotton traders said this meant China may need to
import more cotton than previously thought.

 "A big supportive factor for prices is the second downgrade
to Chinese cotton crop prospects within a fortnight," Mathews
said. "It has naturally raised expectations of
higher-than-expected Chinese imports this year."

 The U.S. Agriculture Department, in its last supply report,
upped its estimate of Chinese cotton imports in 2010/11 to 13
million 480-lb bales from 12.75 million in last month's data.
WASDE20

 China's economic planning ministry warned on Thursday
against speculation in the country's cotton market, but
analysts said this may not have much impact because strong
liquidity is supporting prices.

 A weekly report by the U.S. Commodity Futures Trading
Commission showed funds' net long positions in cotton had
fallen slightly.

 Noncommercial net long positions fell to 35,020 lots, from
35,875 lots. Managed money accounts' net long standing was at
44,026 lots, from 47,120 lots.