* Concerns about nearby tightness widen backwardation
* China's growing stockpile ignites supply concerns
* Funds race for cover ahead of options expiry
NEW YORK, April 11 (Reuters) - Cotton futures rallied on Wednesday, with the May contract briefly breaching its 100-day moving average, on short-covering triggered by concerns about nearby supply tightness due to China's voracious buying.
Concerns about nearby tightness were inflamed by Tuesday's U.S. government data that revealed stronger-than-expected buying by Beijing's strategic reserve.
That sent nearby prices higher, but fears about an overhang of stock going into the new season in August hurt forward prices and pushed the backwardation to a January high.
The benchmark May cotton contract on the ICE Futures U.S. exchange settled up 1.84 percent at 91.38 cents per lb after breaching its 100-day moving average of 91.98 cents.
Prices rose as much as 3.22 percent to 92.62 per lb, the biggest daily rise since March 5, before easing in the afternoon. The 200-day moving average at 95.97 cents remained elusive.
A drop in open interest of 11,455 contracts, taking the May contract total to 47,116 overnight, revealed the extent of the race by merchants and hedge funds to cover their short positions ahead of the Friday options expiry.
"This is a short-covering rally. You can see that in the drop in open interest. People are moving out of the May" contract ahead of options expiry, said John Flanagan, cotton analyst at Flanagan Trading Corp.
Some hedge funds and merchants were forced to run for cover, having been caught by surprise by concerns about nearby tightness in supply after the U.S. Department of Agriculture's monthly supply-and-demand report showed a surprise jump since March in China's strategic reserve stockpile.
Investors and other players fear the material, representing over a third of global ending stocks for the 2011/12 season, will be kept off market. India also has a growing inventory.
But the speculators had bet on falling nearby prices ahead of this week's rollover by the commodity indices from the May to July contracts, a U.S. trader said.
"The pain threshold kicked in. Basically, don't short the old crop. It is functioning on the basis of a tight structure," he said.
"We're seeing a bigger appetite from China than was factored in. The hedge funds that trade the rolls had their fingers burned."
Cotton's rally also drew support from broadly positive equity markets, buoyed by Alcoa Inc, which reported better-than-expected first-quarter results and kicked off earnings season on a positive note.
While Beijing's stockpiling creates a perception of a nearby, short-term supply squeeze, there are no such concerns about the upcoming 2012/13 season, particularly given that ending stocks for the current season are estimated to be at all-time highs above 66 million bales, traders said.
Bearish headline data from the USDA, including a forecast that consumption will drop by 500,000 tonnes, knocked prices lower further along the price curve.
The December contract fell 0.24 percent to 87.11 cents per lb. The rise in the May contract and pressure on December prices, representing the 2012/13 season, have widened the backwardation to its highest level since Jan. 23.
