(Reuters) - The U.S. cotton industry asked senior government officials this week to help prevent contract defaults that it said threaten some $1 billion in sales.

Escalating the issue to the government for the first time underscores growing concerns that a slew of contract defaults, caused by a surge in prices to record highs and their subsequent collapse, will do long-term damage to the industry.

The trade delegation met with Department of Agriculture Secretary Thomas Vilsack, Trade Representative Ron Kirk and Assistant Secretary of State William Craft, the National Cotton Council (NCC) said.

The group's warning was stark: sales of more than 4 million bales of cotton worth $1 billion are either in default or at risk of default by textile mills in countries including Bangladesh, Indonesia, Thailand and Vietnam.

With the NCC were the American Cotton Shippers Association (ACSA); AMCOT, which represents four major U.S. cooperatives; executives from merchant Cargill Inc. CARG.UL and North America's largest textile mill, Parkdale Mills Inc; and the National Council of Textile Organizations (NCTO).

"The defaults are threatening the ability and the willingness of cooperatives and merchants to enter into forward contracts with producers, thereby reducing competition for cotton fiber and resulting in lower prices for farmers," Jimmy Dodson, Vice Chairman of the National Cotton Council and a Texas-based cotton producer, said in the NCC statement.

It is not known if Vilsack agreed to take action as a result of the gathering.

The delegation urged U.S. politicians to pressure foreign government counterparts, and warned that a failure to enforce contracts will disrupt international trading relations and undermine the support for future trade agreements.

"Contract sanctity is a fundamental building block of trade relations and widespread disregard of the principle should sound a loud warning to the extension of trade preferences," Ricky Clarke, a merchant with Cargill Cotton in Cordova, Tennessee, said. He is also chairman of the ACSA.

"The U.S. government should carefully consider a foreign government's record of enforcing commercial commitments when granting eligibility to a U.S. trade preference program."

Other U.S. commodities enjoying record prices, such as grains and oilseeds, could be at similar risk if the United States doesn't take a strong stand in defense of contract sanctity, the NCC said.

While trade organizations oversee arbitration cases using internationally-recognized procedures, many foreign mills have refused to honor awards handed out, the NCC said.

In many cases, host governments appear to be protecting the foreign mills from enforcement of awards, a concern exacerbated in cases in which the mills themselves are state owned, it said.

The talks come at one of the cotton market's most tumultuous periods, with merchants still reeling from last year's widespread contract defaults when farmers and mills walked away from contracts at the height of price volatility.

When prices more than doubled to above $2.2 per lb in March last year, farmers who had contracted to sell crops at much lower prices reneged on those deals. That forced merchants to buy at much higher prices to meet their export commitments.

They got hit again. When prices then collapsed to historic averages around 90 cents, mills refused to pay the higher prices agreed in their rush to secure supplies.

Price gyrations have subsided this year, but traders say contract defaults have become endemic, with counterparties quicker than ever to walk away from deals if prices shift.