* USDA raised soy production outlook by 1 pct * Palm oil stocks set to rise in September -traders * Technicals neutral, could turn negative (Updates throughout, adds comment/detail) By Niluksi Koswanage KUALA LUMPUR, Sept 13 (Reuters) - Malaysian palm oil futures retreated on Tuesday from near one-month highs hit the previous day as a better-than-expected production outlook for the U.S. soy crop signalled improving vegetable oil supplies. The U.S. Department of Agriculture unexpectedly raised its U.S. crop production outlook by 1 percent in a monthly report, despite forecasts for a smaller crop due to hot, dry weather this summer. While this is a small rise, it adds to the view that global edible oil supplies will improve as traders see Malaysian palm oil production and stocks recovering this month as estate workers return from a Muslim holiday. "The question is whether palm oil futures will drop and stay below 3,000 ringgit for an extended time period," said a trader with a foreign commodities brokerage. "My guess is that could happen since Malaysian and Indonesian production is recovering this month and could climb significantly," he added. By midday, benchmark November palm oil FCPOc3 on the Bursa Malaysia Derivatives Exchange fell 1.4 percent to 3,027 ringgit ($999.51) per tonne. Prices the previous day hit a near one-month peak at 3,076. Overall traded volumes stood at 8,050 lots of 25 tonnes each compared to the usual 12,500 lots. According to Reuters analyst Wang Tao, palm oil FCPOc3 turned neutral following a retracement on Tuesday to a low at 3,022 ringgit per tonne. Signs of a build up in palm oil stocks are growing as cargo surveyors have reported sharp declines in Sept. 1-10 Malaysian exports. "It is very significant and it is giving a breather to palm oil stocks in Malaysia that have fallen for two straight months. The build up starts in September, surely," said another trader. Oil tracked equities higher on Tuesday, rising by as much as $1, while a weaker dollar rekindled some of the appeal of commodities as concern about Europe's deteriorating debt crisis eased temporarily. Vegetable oil markets largely ignored the gains in crude oil as the improved outlook for the U.S. soy crop weighed. U.S. soyoil for October delivery barely moved in Asian trade after falling in the previous session. The most active May 2012 soybean oil contract on China's Dalian Exchange fell 1.3 percent. Palm, soy and crude oil prices at 0435 GMT Contract Month Last Change Low High Volume M'ASIA PALM OIL SEP1 3106 -44.00 3106 3114 168 M'ASIA PALM OIL OCT1 3068 -39.00 3060 3074 830 M'ASIA PALM OIL NOV1 3027 -44.00 3022 3040 3990 M'ASIA PALM OIL DEC1 3019 -42.00 3013 3029 1855 DALIAN SOY OIL MAY2 10334 -140.00 10326 10402 323666 CBOT SOY OIL DEC1 57.70 -0.05 57.69 57.99 0 NYMEX CRUDE OCT1 89.00 +0.81 88.62 89.21 5350 Palm oil prices in Malaysian ringgit per tonne CBOT soy oil in U.S. cents per pound Dalian soy oil in Chinese yuan per tonne Crude in U.S. dollars per barrel ($1 = 3.029 Malaysian Ringgit) (Editing by Michael Urquhart) ((niki.koswanage@thomsonreuters.com)(+603 2333 8035)(Reuters Messaging:)(niki.koswanage.thomsonreuters.com@thomsonreuters.net )

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