NEW YORK, Oct 27 (Reuters) - U.S. cotton futures closed
Wednesday six cents lower after dropping by their trading limit
at the open and remaining there for much of the day.

Brokers said, speculative profit taking triggered a rush to
the exits, a day after fiber contracts pushed up to record
prices, reaching their upside limit on heavy volume.

Traders said cotton futures fell limit-down on technical
selling and in reaction to a stronger dollar.

ICE Futures U.S. key December cotton contract
tumbled their 6.0-cent limit to end at $1.2359 per lb, a 4.63
percent decline.

On Tuesday, December futures ran up to a new all-time
record of $1.2854 per lb on sizable volume by mill and
speculative fund buyers. Tuesday's futures tally jumped to
52,707 lots and followed Monday's 17,012-lot volume.

Tuesday's open interest grew by 1,176 lots to 239,499.

'The market appears to be down on speculative profit taking
that began yesterday. All the signs of a high volume, panic
blow-off were there, including options reaching 60 percent
volatility in a frustrating, panic effort to grab anything for
protection,' said Mike Stevens, an independent cotton analyst
in Mandeville, Louisiana.

Most important, he added, 'even after being locked limit up
at (Tuesday's) close, December sold off 144 points and March by
132 points in the 15 minute post-close, a sign of exhaustion.'

After the downside limit was set, just after Wednesday's
open, brokers said, some pent up sellers moved to the options
market and brought prices down another 2.59 cents in the
synthetic market, to levels where buying reappeared.

The ICE exchange issued a notice that said, December cotton
futures settled at their downside price limit, so, 'ICE Clear
U.S. was providing a synthetic futures price for
informational and option settlement purposes only.'

ICE Clear U.S. said it will use the limit futures
settlement price of $1.2359 per lb. and the synthetic price of
$1.2350 for December cotton futures for clearing processing.

Other cotton market participants were able to conduct some
business by spreading December against March, brokers sad.
March cotton finished 5.67 cents, or 4.52 percent, lower at
$1.1964 per lb. The contract fell as low as $1.1931, also
reaching its 6-cent downside limit.

Whether prices continue their sharp decline remains to be
seen, analysts said. Recent similar price action was ultimately
sorted out with prices continuing their uptrend.

Overnight in China prices were higher. Many market players
have been keeping an eye on the pace of buying in the Chinese
market, where cotton demand has been rapidly heating up.

This week, China's Zhengzhou Commodity Exchange's said it
would hike trading bands and margins in some commodities that
trade on the exchange. It also issued new
guidelines on Monday to monitor 'abnormal trading behavior,'
after speculation pushed up soft commodities to record highs
repeatedly.

Fundamentally, some analysts said cotton still faced tight
supplies, amid healthy demand. But whether prices continue
climbing to new records may depend on investment fund buying.

Other analysts, however, think China could be forced to
replenish strategic reserves, run down in a failed attempt to
cool prices.