* Plans to release cotton from govt reserves spook market
* Move intended to cool global prices
NEW YORK, March 20 Cotton fell more than 2 percent on Wednesday, its largest daily loss in two months, as news that top producers India and China will release cotton from government stocks spurred profit-taking.
The most-active May cotton contract on ICE Futures U.S. declined 2.03 cents, or 2.2 percent, to settle at 89.10 cents per pound in the largest daily loss the spot contract has registered since late January.
Trading volumes were relatively heavy, at more than 25,000 lots and about 5 percent higher than the 30-day average, according to preliminary Thomson Reuters data.
The tumble derailed, at least temporarily, fiber's longest bull run in two years, which pushed prices to a one-year high of 93.93 cents a lb last week. Fiber has been the best-performing commodity so far this year after two years of double-digit percentage declines.
Investors rushed to sell positions after news that India plans to sell cotton from government stockpiles to local buyers, joining China in efforts to dampen the recent price surge.
Earlier on Wednesday, an international farm group official said China plans to sell 3 million tonnes of its state reserves.
Plans to offload some stock by the world's largest cotton producers and consumers may have spooked the market, said Nick Gentile, senior partner of commodity trading consultancy Atlantic Capital Advisors. The United States is the world's largest exporter of cotton.
Profit-taking took prices as low as 88.17 cents, where some buying returned after the market pierced fresh technical support at 89 cents a lb.
"It's a correction, and there may be more profit-taking, especially if there is not a strong export sales report," said John Flanagan, an analyst at Flanagan Trading Corp in North Carolina, referring to the U.S. Department of Agriculture's weekly export sales report due on Thursday.
The data will reflect sales and shipments through March 14. Earlier this month, the USDA revised upward its expectations for global consumption, citing recent sale and shipment levels.
India, a net exporter of cotton, has been importing raw fiber in recent weeks, as high domestic prices and lack of ready supplies made imported material attractive.
Spinning mills in India have seen strong Chinese demand for yarn, a semi-finished product that does not incur the same import duties as raw fiber. Integrated mills in China have found it less expensive to skip processing raw fibers and instead import duty-free yarn from Pakistan, India, Vietnam and Turkey.
Prior to Wednesday's decline, cotton had surged about 20 percent since the start of the year, driven by speculative buying and underpinned by physical demand as well as reports among traders of tightening supplies in recent weeks.
Those factors have offset lingering concerns about a record global surplus in the 2012/13 marketing year through July.
More than half of inventory is expected to be held by Beijing's reserves and therefore unavailable to the global market. (Reporting by Chris Prentice; Editing by Dale Hudson)