UPDATE 6-Copper falls 10 pct on higher stocks, demand fears

* Copper reverses, falls 10 percent in volatile trade

* Global demand worries and rising stocks dent sentiment

(Updates prices, adds analyst comment)

By Anna Stablum and Michael Taylor

LONDON, Oct 30 (Reuters) - Copper fell by 10 percent on Thursday as rising London Metal Exchange stocks halted this week's short-covering rally in industrial metals and recessionary worries returned.

The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years on rising fears that recession was setting in. [ID:nN29534671

Also hitting sentiment, the U.S. dollar hit session highs against the euro, after trading lower for most of the global session, as investors bought back the greenback to rebalance portfolios for month-end purposes.

"We have never seen moves like this before...it is uncharted territory," said Kevin Norrish, analyst at Barclays Capital.

He said the extreme price volatility was related to macro-economic concerns, huge movements in interest rates and exchange rates and very low levels of liquidity.

"What we have seen over the last few days is a short-covering rally in a situation where people are still very negative about the outlook," Norrish said. Three-months copper fell 10 percent to an intraday low of $4,190 a tonne after LME stocks came in at 223,875 tonnes, up 6,575 tonnes.

Higher stocks reminded investors that demand for industrial metals is falling sharply and prices turned lower after rising by 3.5 percent to a one-week high of $4,820 earlier.

"It was just a short blip, we are still in a downtrend and prices will definitely head lower now," an LME ring dealer said.

At 1558 GMT, copper -- seen as a key gauge of real economic activity -- was at $4,220, down from $4,655 at the close on Wednesday, when it surged 12.6 percent.

Prices have risen around 13 percent so far this week as investors covered short positions, but for the month prices are still down 30 percent, which at the end of the month could be the biggest fall in at least three decades.

"Focus is still on China, and there is a lot of concern about the potential of further big declines in export levels and debate over the extent of the stimulatory measures that have been announced if they will really help," Norrish said.

On Monday, copper prices dipped to $3,590 a tonne, their weakest for more than three years.

"The volatility is quite large and the jump up in copper in the morning reflects that," said Justin Lennon, a copper analyst at Mitsui Bussan Commodities in New York. "We have two months for the rest of the year...I see copper going lower. After that in the first quarter, it'll probably bounce back."

Nickel surged 14 percent on Wednesday as short positions were covered but, like the other metals, prices fell on Thursday to a low of $11,900, down 12.8 percent.

It was last at $11,950 against $13,640 on Wednesday.

Lead dropped, down 8.5 percent to a low of $1,445 before tracking back to $1,460 versus $1,580.

Zinc stocks also came in higher at 182,100 tonnes, sending prices to a low of $1,145 a tonne. It was last at $1,155, down 8.3 percent versus Wednesday's $1,260.

Britain's leading FTSE share index was 0.9 percent lower, as Kazakh copper producer Kazakhmys said it may cut copper output next year due to lower projected spending arising from global financial instability.

Producers have started to cut back production across metals as falling prices put profit margins under pressure.

"All these producer cutbacks are bearish as it really shows how bad the demand picture is," said another LME ring trader.

"But of course once demand picks up again it will create tight supplies with potential for another bull run," he said.

In other industry news, Russia's richest man, Oleg Deripaska, became the first beneficiary of a Kremlin-backed rescue package when his flagship company secured a $4.5 billion loan needed to keep its stake in Norilsk Nickel.

LME tin shed 6.1 percent to $14,300 against Wednesday's close of $15,225. Tin prices are up about 50 percent since plunging to a 21-month low of $10,300 on Oct. 24.

In contrast to most other metals, tin stocks have dropped 75 percent since August last year to 3,770 tonnes.

Copper stocks have risen by 80 percent in the same period.

Aluminium was 3.7 percent lower at $2,071, down from $2,151 on Wednesday. (Additional reporting by Nick Trevethan in Singapore, editing by Editing by Peter Blackburn)