COMMODITIES-Up again despite dollar; copper, cotton hit record

* Up second straight day as investors bet on 2011 rally

* CRB hits 26-month high; trading volumes thin as expected

* Coming up: U.S. existing home sales data on Wednesday

NEW YORK, Dec 21 - Commodity prices rose for a second straight day on Tuesday as investors betting the sector would keep rallying in 2011 bought into thinly traded markets, pushing copper and cotton to a record and many markets higher.

The 19-commodity Reuters-Jefferies CRB index hit a 26-month peak, again defying a stronger dollar as the currency extended Monday's trend against the euro amid worries of more credit downgrades for debt-laden euro zone economies.

Commodities began 2010 on a wobbly footing, with the CRB down 10 percent in the first half, as investors preferred the dollar to raw materials due to a weak recovery from recession.

But the CRB is poised to finish the year up 15 percent, due to tight commodity supplies and other improved fundamentals, including a $600 billion U.S. stimulus package that promises to boost inflation down the road.

Even so, this week's runup in prices has surprised analysts, who had expected some jarring moves here and there but otherwise quiet trading going into the holiday season, which begins with Friday's pre-Christmas holiday.

Volumes across the energy, metals and agricultural complex dipped as expected on Tuesday, falling nearly half from the 30-day average by 2:30 p.m. EST (1930 GMT).

But all-time highs in copper and cotton, three-decade peaks in sugar and 13-1/2-year tops in coffee showed some investors were not taking it as easy as thought.

"This is year-end and people are squaring their books, but it seems like there are fresh funds coming in," said Andrey Kryuchenkov at Moscow-based commodity traders VTB Capital.

Although the rising dollar made commodities priced in the U.S. unit costlier for those holding the euro or other currencies, some still found raw materials a good buy.

"The euro is not in very good shape at the moment," said Herwig Schmidt, head of sales at Triland Metals, a London-based commodities broker.

"The U.S. also does not look very good with the monetary easing. With interest rates at (close to) zero, people can't even invest in bonds ... So people flee to commodities."

Aside from the dollar, investors will have a lot more to focus on in the next two sessions as data providers in the United States release a host of key macroeconomic numbers beginning with existing home sales on Wednesday.

TIGHT SUPPLY, SPECULATION

In copper, the benchmark three-month futures in London soared $191 to a record $9,392 a tonne as shipment delays in top producer Chile and robust demand prospects in China underscored a tightening supply-demand balance.

Copper's most-active futures contract in New York, March, finished up 7 cents, or 1.7 percent, at $4.2760 a lb.

U.S. cotton futures closed at an all-time high as the market rose by its daily limit for a second straight session, driven by speculative buying and tight supplies.

New York's key March cotton contract rose by the 5.00-cent limit to finish at $1.5912 per lb.

Speculative fund buying and tight supplies also took arabica coffee to its highest close in 13-1/2 years and raw sugar to a 30-year peak in New York.

Arabica, a premium grade preferred by roasters, jumped more than 4 percent, or 9.20 cents, on the March contract to end at $2.3385 per lb, its highest settlement since mid-1997.

March raw sugar rose 0.06 cent to end at 33.02 cents per lb, having hit a 30-year intraday high at 33.65.