* India gives upbeat assessment of cotton crop
* Prices close off intraday lows
* Lenzing warns of waning textile demand

NEW YORK, Aug 22 (Reuters) - Cotton prices slipped off
three-month highs on Wednesday as producer selling and
indications of healthy crop planting in India ended fiber's
brief flirtation with bull territory.
Some investors also took profits after the government of
India, the world's second-largest producer, said planting was
progressing even after weak monsoon rains that some had feared
would hamper crop development.
Prices fell as much as 3 percent in early trade to an
intraday low of 74.9 cents per lb before recovering most of the
ground in a late-stage recovery.
The benchmark December cotton contract on ICE Futures
U.S. settled 0.42 percent lower at 76.97 cents, which was just
shy of the day's high and helped the market cling to most of the
7 percent gains notched up over the previous three sessions.
The market teetered on the cusp of bull territory on
Tuesday, up 20 percent since the start of June.
"The bulk of the trading was done at the higher levels,"
said Lou Barbera, cotton analyst at ICAP Cotton in New York.
The catalyst for selling was the Indian government's comment
that the country's cotton crop has so far survived the poor
monsoon rains.
"Condition of cotton crop is good as of now, but nothing
final can be said about the output as the crop is still in the
maturing stage," Farm Minister Sharad Pawar said on Wednesday.
To be sure, any cut in output is unlikely to wipe record
inventories carried over from the marketing year that ended in
July unless there is a significant improvement in demand.
But traders had hoped that crop damage would remove some of
the excess and make a dent in the 2012/13 stockpile, which is
expected to hit new records by next summer.
"The U.S. harvest is almost upon us and there might not be
enough homes for the carryover from last year," said Barbera.
"The (2012/13) U.S. crop is going to be larger than
initially expected and Chinese consumption should fall given the
size of the stockpile."
The selling on Wednesday may be a brief lull before another
run-up, but buying is likely to run out of steam above 79 cents
given the weak fundamentals, traders said.
Open interest dropped slightly on Tuesday from a day
earlier, according to the latest exchange data, suggesting that
a portion of the recent rally was due to short-covering. Open
interest, an indicator of market liquidity, fell 401 lots to
180,247.
The return to prices above 76 cents helped attract volume,
particularly in options. Over 15,500 lots were traded, well
below the 30-day average of 24,000 lots but a two-thirds
improvement from Monday and late last week.
A profit warning from Austrian cellulose fiber maker Lenzing
which blamed sluggish demand -- particularly from
China, the world's largest textile market -- reinforced concerns
about the weak market fundamentals.