U.S. cotton ends limit-down on China inflation move

* China rate hike fears drag cotton down by daily limit
* Elevated prices may hurt demand growth - analysts
* Liquidation pressures may persist into next week (Updates with closing prices, analyst comments)

U.S. cotton futures ended down by their daily limit on Friday after another move by China to slow its economy led to further liquidation before the weekend, brokers said.

The benchmark March cotton contract on ICE Futures U.S. closed down 6.00 cents, or 4.65 percent, at $1.2315 per lb.

The decline caught many market participants off-guard following Thursday's limit-up move.

"I'm real surprised the market has gotten pounded like this because the China news was kind of what got us going down earlier this week," said Jobe Moss, an analyst for brokers and merchants MCM Inc in Lubbock, Texas.

China's central bank stopped short of a rate hike on Friday by deciding to raise the reserve requirements of banks for the second time in two weeks, signaling to investors its determination to tighten capital as needed to fight inflation.

Still, the U.S. cotton market remains the top performer on the Reuters-Jefferies Commodity Index, up over 70 percent in the year to date.

Last week, cotton rallied to a record peak at $1.5723 per lb.

Kona Haque, an analyst with Macquarie Bank, said that with prices trading well above production costs and speculative exposure quite high, any pull-back could become quite severe.

"At current elevated prices, demand growth will start to get hurt as mills turn to synthetic blended yarns," she said.

Even an excellent pace of export sales failed to keep sellers at bay.

The U.S. Agriculture Department's weekly export sales report showed U.S. cotton sales at 566,700 running bales (RBs, 500 lbs each), around the eighth time in nine weeks sales have topped 500,000 RBs.

"We sold nearly 80 percent of what we had projected to sell for the whole season already, and yet the market failed, and failed miserably last night," said Mike Stevens, an independent cotton analyst in Louisiana.

"Fridays are notorious for putting one side or the other's feet to the fire, and obviously the bull's feet are to the fire today. It gives every appearance that there is more to go to the downside," he said.