(Updates prices, adds details)
NEW YORK, March 20 (Reuters) - Cotton tumbled on Wednesday on profit-taking spurred by news that India and China plan to release cotton from government stockpiles, potentially decreasing demand for imported material.
The most-active May contract fell 2.02 cents, or 2.22 percent, to 89.11 cents per lb at 1:40 p.m. EDT (1740 GMT) on Wednesday, paring an earlier drop to 88.17 cents.
India and China are both expected to release cotton from government reserves in efforts to soften global cotton prices. The moves would likely decrease demand in both countries for imported fiber. Demand from the two countries supported a recent price surge.
The news "affected the psychology (of the market) this morning and led to some profit-taking by longs, which set a correction in motion," said Peter Egli, director of risk management for Plexus Cotton Ltd, a British-based medium-sized merchant.
Cotton had increased about 20 percent since the start of the year. Speculators increased bullish bets on cotton futures and options to a five-year high.
Physical demand for cotton underpinned the recent rally. Earlier this month, the U.S. Department of Agriculture revised upward its forecast for global cotton consumption by the end of the crop marketing year through July, citing recent sale and shipment levels.
India, a net exporter of cotton, has recently seen an uptick in demand for imported fiber, thanks to rising domestic prices following a seasonal slowdown in output and government stockbuilding.
China, the world's top textile market, is expected to hold more than half of the world's projected record surplus by the end of July, with those stocks seen as unavailable to the global marketplace.
Beijing began building its strategic reserves in 2011, paying above global prices to support farmers.
By the end of July, the country is forecast to have enough cotton in its stocks to meet demand for more than a year.
Plans to release cotton from those reserves could derail the recent surge in prices, fiber's longest bull run since 2011, analysts and traders have said.. (Reporting by Chris Prentice; Editing by Lisa Von Ahn, Leslie Gevirtz and Bob Burgdorfer)