* Cotton jumps 1.6 percent following USDA report
* USDA says more than half world carryover in China
* Fiber posts first weekly loss since start of year
By Chris Prentice
NEW YORK, Feb 8 (Reuters) - Cotton prices rose on Friday after the U.S. government forecast the size of China's strategic stockpile would eclipse the surplus elsewhere in the world, feeding hopes that fundamentals may be better than many had feared.
While the report may propel further speculative cash into the niche market, Friday's gains were not enough to prevent fiber's first weekly decline since the start of the year.
The most-active March cotton contract on ICE Futures U.S. settled up 1.27 cents, or 1.6 percent, to 82.67 cents per pound on Friday.
The spot contract punched as high as 83.03 cents a pound, surpassing an earlier intraday high, after the release of the U.S. Department of Agriculture's monthly crop report, which included an estimate that China will hold more than half the world's inventory by July.
Alongside an improved outlook for the United States, that caught the most attention.
"The market jumped quite significantly ahead of the report on anticipation there could be bullish news, and the report delivered that," said Rabobank cotton analyst Keith Flury.
The USDA increased its forecast for global cotton stocks for the 2012/13 season which ends on July 31, but the increase was due to a 2 million bale rise in China where the government is hoarding a staggering 42.61 million 480-lb bales, or 52 percent of the carryover.
That rise more than offset a sharp cut in stocks elsewhere.
For the United States, the USDA lowered its estimate for stocks to 4.5 million bales, down by 300,000 bales, which Knight Capital cotton specialist Sharon Johnson described as "friendly".
Trading volumes were heavy, totaling nearly 39,000 lots and well above a 250-day average of about 24,000, according to preliminary Thomson Reuters data.
Friday's gains were not enough to prevent cotton from posting its first weekly loss in six weeks. Prices fell by 0.4-percent and brought a five-week rally, its longest one since early 2011, to an end.
Some worry that higher prices will hurt demand. Rising certified stock have also pressured spot prices and kept May at a premium ahead of spot's expiry on March 18.
Exchange stocks exceeded 173,000 480-lb bales on Thursday, up about 20 percent on the week, according to ICE data.
Hedgers, who are holding material and have sold forward, want to maintain a contango to boost the value of their cotton.
The surge above 83 cents per lb on Friday attracted merchant and producer selling and stalled the rally, said Ron Lawson, a partner at commodity investment firm LOGIC Advisors.
"At some point, we'll get some selling by the trade as prices rise too far," Lawson said.
A ramp-up in speculative interest has spurred the gains so far this year. Speculators increased their bullish bets in cotton for the fourth week in a row to the highest level in 2-1/2 years in the week to Feb. 5, U.S. Commodity Futures Trading Commission data showed on Friday. (Reporting By Chris Prentice; Editing by Chizu Nomiyama)