* Fiber posts 4th weekly decline of year
* Thomson Reuters-Jefferies CRB falls most since October
* Index fund roll adds pressure to cotton prices
NEW YORK, April 5 ICE cotton posted its largest one-day drop in 2-1/2 weeks on Friday, as weaker-than-expected U.S. government data prompted concern over the health of the world's largest economy and pressured commodities markets.
The most-active May cotton contract on ICE Futures U.S. decreased 1.54 cents, or 1.7 percent, to settle at 86.79 cents per pound, the spot contract's largest one-day drop since March 20.
The spot contract fell more than 2 percent from last week's close to register its fourth weekly loss this year.
The benchmark Thomson Reuters-Jefferies CRB fell for a fifth session to its largest weekly loss since October, and the Dow Jones Industrial Average fell, after U.S. government data showed American employers slowed their hiring pace in March.
The week's losses suggested that cotton's recent upswing may be losing momentum, dealers said.
Cotton increased some 18 percent in the first quarter, largely driven by speculators' investments, following two years of losses as lower-priced alternatives eroded demand and global stockpiles grew.
Mill buying underpinned last month's rally to a one-year high of 93.93 cents, but that has slowed in recent days, merchants said.
"If nothing is going on on the physical side, everybody is waiting, and it only takes a few specs saying the momentum seems to be fading (for prices) to drift lower," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.
Thursday's weekly U.S. government export data was not seen as strong enough to push prices higher, traders said.
Speculators increased their net long position in cotton futures and options in the week ended April 2, U.S. government data showed, though they have dialed it back from last month's five-year high. Commercial dealers hold a large net short position in cotton contracts.
Open interest remains at high levels, and the market is still prone to rallies on new buying or short-covering, dealers said.
The start of the index fund roll out of the spot contract added pressure to prices on Friday.
The July contract closed down 1.4 cents, or 1.6 percent, at 88.57 cents per lb, and the December contract settled down 1.23 cents, or 1.4 percent, at 86.71 cents a lb.
The world is forecast to hold a record global surplus by the end of the crop year through July. More than half of that is expected to become part of China's stockpiles and is considered unavailable to global marketplace.
Beijing began building reserves in 2011, paying above global prices to support farmers. The world's largest consumer is projected to hold enough cotton its stocks by the end of July to feed fiber demand for more than a year. (Reporting by Chris Prentice; Editing by Diane Craft)