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* Cotton declines from highest price since May 2012
* Dollar, commodities basket pressure fiber prices
* May-March spread narrows for first time in eight sessions
By Chris Prentice
NEW YORK, Feb 21 (Reuters) - Cotton posted its largest one-day loss in nearly a month on Thursday, as prices corrected down from the nine-month highs reached earlier this week and as declining oil and grain prices pressured fiber.
The most-active May cotton contract on ICE Futures U.S. fell 1.23 cents, or 1.5 percent, to settle at 83.23 cents per pound. That was fiber's largest decline since falling about 2 percent on Jan. 25.
Though prices rebounded after earlier touching as low as 83 cents, they failed to approach the nine-month highs reached earlier this week. Tuesday's run-up to more than 85 cents, the highest price since May 2012, prompted a price correction.
"Given how much we rose on Tuesday and Wednesday, it's not unusual to see the market pull back," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.
Cotton rose as high as 84.87 cents on Tuesday and then breached that high on Wednesday in a surge to 85.24 cents. Wednesday's morning rally proved unsustainable, with the market only posting a slight increase by the day's close. The downward momentum continued on Thursday.
Cotton prices were also pressured by outside markets.
"You've got the dollar surging higher, which makes U.S. cotton exports a little more expensive," said Chris Kramedjian, a risk management consultant for INTL FCStone.
The dollar index reached a five-month high, after registering its biggest one-day gain in seven months during the previous day's dealings.
The Thomson Reuters/Jefferies CRB index fell, as oil dropped to three-week lows. A decline in wheat and corn, cotton's competition for acreage, added to the pressure.
While the U.S. government has forecast that plantings of eight major U.S. field crops, including cotton, will be 1 percent lower next year, the USDA revised higher the projections it made earlier this month.
The spot March cotton contract on ICE settled down 0.97 cent, or 1.1 percent, at 81.31 cents a lb.
The May-March contract spread narrowed for the first time in eight sessions, to 1.92 cents per lb. It remained one of the highest premiums the second month has held to the spot contract since May 2012.
Speculators have driven the recent price rally, with cotton up nearly 9 percent since the start of the year. The surge followed two years of losses, as fiber met competition from lower-priced, man-made alternatives and global inventories grew.
Rising prices have drawn merchants and producers to bring cotton to the exchange. Certified stocks are the highest since July 2010 at more than 307,000 480-lb bales on Wednesday, according to ICE data. Another 53,000 bales awaited review by the USDA on Thursday.
That compares to about 95,000 bales listed on the exchange at the start of the year and about just 8,000 in October 2012. (Reporting by Chris Prentice; Editing by Bob Burgdorfer)