By Shaimaa Fayed

CAIRO (Reuters) - Egypt's once-famous cotton industry risks a slow death without state investment to reverse decades of neglect, boost quality and encourage farmers to keep growing the crop.

Analysts say the textiles sector has been overlooked amid a wave of other reforms.

"It's not easy to reverse the effects of years and years of neglect," said Mena Sadek, consumer goods analyst at investment bank Beltone Financial. "Anything you do without restructuring will not work. It will be a short-term solution."

In its heyday in the 1960s, Egypt's "white gold" was highly sought after by those seeking smooth luxury bedsheets, soft thick towels and lavish apparel.

But cheaper raw cotton imports have made inroads as ailing textile firms, stunted after decades of poor investment, have focused on creating low-quality products. Farmers are also turning away from cotton to more lucrative crops such as corn.

The state has long promised to pay more attention to the sector. But the textile industry is bogged down by old machinery, and lacks the design and technology expertise among its workers that is needed to lure foreign firms to Egypt.

"The market is unbalanced," said Mohamed Abdel Aziz, head of Egypt's state-run Cotton Research Institute. "The industry was neither really privatised nor left public."

Liberalisation in 1994 exposed farmers to volatile global prices and rising fertiliser costs. Lower domestic demand for pricey extra long staple cotton also took a toll as spinners turned to cheaper, lower-quality imports.

"I can grow vegetables that can make profit, so why should I continue with a losing crop?" says Fadl El Sherif, a cotton farmer in Egypt's Kafr El Zayat governorate.

Cotton acreage fell dramatically and in 2009 was at just 285,000 feddans, yielding roughly 100,000 tonnes of lint cotton. Imports, meanwhile, surged to nearly the same amount.

In the 1960s, Egypt produced up to 2.2 million feddans (924,000 hectares) of cotton, helped by fixed state prices.

TRADE ISSUES

Creating a support fund with contributions from players across the textile sector could in the short-term ensure poor farmers alone do not bear the risk of price fluctuations.

Egyptian cotton farmers also want import bans and price guarantees from the state, noting that the United States and others subsidise their own farmers. But such measures face opposition from Egyptian traders and manufacturers.

Egypt complains that developed world cotton subsidies hurt its farmers who receive no such help. Africa wants the U.S. subsidies lifted as part of world trade talks.

"Every year they talk about it, but the U.S. still does it," the Cotton Research Institute's Abdel Aziz said.

Egypt's cotton farmers initially benefited from liberalisation as prices soared because they could sell to the highest bidder. But spinning mills were also lured to cheaper shorter-staple raw cotton from Greece or Sudan.

Abdel Aziz said those imports jeopardise Egypt's cotton production and the livelihoods of at least half a million families working in cotton farming and ginning.

Egyptian traders, however, say spinning mills cannot afford and do not need long staple cotton. They say Egypt already has non-tarriff barriers to cotton imports, including requiring double fumigation, and does not need more.

"You call for a ban on imports and you penalise the spinning industry. And they have historic debts they are unable to pay," said Ahmed El-Bosaty, Chairman of Modern Nile Cotton Company, Egypt's biggest cotton trader and a subsidiary of textile firm Arab Cotton Ginning, privatised in 1996.

He wants Egypt's high-quality long staple cotton marketed as a niche luxury product, adding that when President Gamal Abdel Nasser nationalised the industry, spinning mills used high-quality Egyptian cotton to produce a lower quality product.

"The industry he put in place was the wrong one for Egypt. It was one of volume and not of quality," he said.