* Specs may take profits next week - analyst
* Steady open interest suggests short covering
NEW YORK, Aug 24 (Reuters) - Cotton prices slumped more than 2 percent on Friday as the market braced for the possible sale of a large portion of Chinese state reserves.
Notching up its largest one-day drop since the last U.S. government supply-and-demand report stoked concerns about a growing surplus, the benchmark December cotton contract on ICE Futures U.S. slumped 2.1 percent to settle at 75.21 cents per lb.
Beijing may sell up to 15 percent of its large cotton stockpile next month, flooding an already saturated market, Reuters reported on Thursday, quoting industry sources.
"How much below the procurement price the (Chinese reserve) cotton is auctioned at will influence mill interest, but psychological impact on the market will be bearish," said Knight Futures cotton specialist Sharon Johnson.
She caution that profit-taking ahead of the long U.S. Labor Day weekend Sept. 1-3 could pressure prices further next week.
Even so, fibers were up almost 3 percent this week, bolstered by early gains when the market briefly flirted with bull territory on technical buying.
That has kept mills on the sidelines in the hope that poor supply-and-demand fundamentals will return to the fore, weighing on prices before they have to buy again.
Steady open interest at around 181,000 lots this week indicates that much of the speculative buying may have been short-covering, with only limited new longs being initiated.
Volume drifted lower on Friday to around 11,600 lots, half the 30-day average and much lower than the liquidity earlier in the week when speculative investors were back.
Source: http://in.reuters.com/article/2012/08/24/markets-cotton-idINL2E8JOC6720120824
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