* Gov't sees bigger cotton area this season due high prices

* GMO soy has made Paraguay a major oilseed exporter

* Monsanto seeks approval for its Bt GMO cotton

By Mariel Cristaldo

ASUNCION, Aug 4 (Reuters) - Paraguay is trying to revive its once-strong cotton production by using genetically modified (GMO) seeds that promise to lower costs, raise yields and help farmers take advantage of high international prices.

Genetically modified soy has helped make Paraguay the world's fourth-biggest exporter of the oilseed, whereas cotton output has fallen sharply since the early 1990s.

Activists are lobbying against the introduction of GMO cotton, arguing that it would cause environmental damage. But after prices hit all-time highs late last year, growers urged regulators to approve GMO cotton in Paraguay, which borders agricultural powerhouses Argentina and Brazil.

"Agriculture today depends directly on costs and yields, and this is where biotechnology plays a very important role," said Marcos Bonzi, a consultant with Paraguay's Production Trades Union (UGP), which includes small cotton farmers.

The group plans to provide seeds and technical assistance to 15,000 small cotton growers toward the end of next year, by which time the government is expected to have approved the use of Bt GMO cotton, which is resistant to caterpillars.

U.S. seed giant Monsanto (MON.N: Quote) last month asked the government to approve the planting of Bt cotton in Paraguay. The country's Biosecurity Commission is expected to issue an opinion in the weeks ahead. The final decision will be taken by Paraguay's Agriculture Ministry.

High international cotton prices have prompted Argentina and Brazil to plant more cotton in recent years.

Paraguay, which sowed nearly 600,000 hectares with the plant two decades ago, lags its neighbors in cotton production but the government plans a comeback. The country had 30,000 hectares planted with cotton in the 2010/11 season, double the area seeded the year before.

Farmers will start planting the 2011/12 crop next month, and the government forecasts area of 50,000 hectares.

"The experts believe that prices will remain above average and there is a lot of enthusiasm in the farm sector," said Ubaldo Britos, head of the government's National Cotton Program.

"Cotton is important in terms of the population because it requires manual labor," he added. "We are looking to put people back to work in the countryside."