Copper down as LME stocks rise, nickel off 3.5 pct

* Copper hits two-week low, down 2.1 percent

* Hurricane Gustav potential threat to LME zinc in warehouse

* Nickel dips more than 3 percent on rising inventories

(Updates prices to mid-session, adds comment)

By Anna Stablum

LONDON, Sept 1 (Reuters) - Copper futures fell 2.1 percent on Monday under pressure from gains in the dollar, rising London Metal Exchange stocks and worries about demand.

Zinc eased but Hurricane Gustav was seen as a potential threat to LME warehouses, analysts said. [ID:nL1329617]

Volumes were low with the U.S. market shut for Labor Day.

"The stronger dollar is troubling prices," Commerzbank analyst Eugen Weinberg said. "We cannot expect large moves today as the U.S. is closed."

London Metal Exchange three-month copper MCU3 fell 2.1 percent, or $155, to $7,355/7,360 per tonne by mid-session.

Earlier, it hit an intraday low of $7,330, the lowest price since Aug. 19.

Nickel MNI3 fell 3.5 percent to a two-week low of $19,550 against Friday's close of $20,250.

Stocks rose 1,206 tonnes to a four-month high of 48,228 and the metal is down 24 percent this year as demand from stainless steel producers, accounting for two-thirds of nickel off-take, has fallen short of expectations.

The dollar approached an eight-month high against a trade-weighted basket of currencies .DXY, and a fall in the euro to below $1.4570 would take the single currency to its lowest level since mid-February. [ID:nL1710526]

A firm U.S. currency makes dollar-priced metals more expensive for holders of other currencies.

RISING COPPER STOCKS

LME copper stocks are at their highest since February, at 173,725 tonnes, although the latest release from the International Copper Study Group said the copper market was in deficit by 155,000 tonnes in the first five months of the year.

Rising stocks have pulled down the backwardation -- the premium for cash material MCU0 over three-months prices -- to $27 per tonne. On July 17, the premium hit the year's high, at $241, with a dominant position capturing most of the market.

Copper dropped 8 percent in value during the past month and in the near term there is a risk of further commodity price correction as global economic and demand growth continue to slow, RBC Capital Markets said in a report.

"Global leading economic indicators continue to point to slowing growth in the U.S., Europe, Japan and other parts of Asia, and China has recently reported lower GDP growth," the report said.

Three-month aluminium MAL3 was down $16 at $2,698.

Aluminium has been forecast to trade at an average of $1.30 a pound ($2,866 a tonne) in 2008 and copper is seen at $3.55/lb ($7,826/t), falling to $3.25 ($7,165/t) in 2009, RBC said.

The 2008 forecast for lead was revised down from the previous quarter at $1.05 per pound or $2,315 per tonne, nickel was cut to $11/lb ($24,251/t) and zinc was seen lower at $0.95/lb ($2,094/t).

HURRICANE GUSTAV

The market cast a worried eye over weather forecasts, which suggested Hurricane Gustav could hit New Orleans, where the London Metal Exchange warehouses are located.

Zinc has risen more than 10 percent since dipping to a 33-month low in mid-August, but the metal mainly used to galvanise steel is down by about 25 percent so far this year.

With almost 40 percent, or 61,000 tonnes, of world LME zinc stocks in New Orleans, some traders feared a repeat of Hurricane Katrina in 2005, which cut off access to about one-half of the available LME stock of zinc for months.

"This location could trigger some short-covering if the LME warehouses are flooded as happened in 2005," said analyst John Reade at UBS.

When Katrina struck in September 2005, LME zinc was trading between $1,300 and $1,400 a tonne. It doubled in price by May 2006. New Orleans also houses about 13,000 tonnes of copper.

Zinc MZN3 shed 1.4 percent or $26 to $1,785, while lead MPB3 was down at $1,965/1,970 versus $1,980 at Friday's close. Tin MSN3, LME's best performer so far this year up by 23 percent, fell 4.5 percent to a low of $19,100 -- the lowest since Aug. 18. At mid-session tin traded at $19,400 against $20,000 on Friday. (Additional reporting by Nick Trevethan; editing by Peter Blackburn)