(Reuters) - India's decision to allow unlimited sugar exports into an already oversupplied market is likely to keep prices at hovering at one-year lows, but it could prove a sweet deal for buyers looking for bargains, dealers said on Thursday.

New York raw sugar futures, which set the tone for global prices, plunged to 20.50 cents a pound on Wednesday after India lifted limits on sugar export volumes following a surplus estimated at around 4 million tonnes.

India is the world's second biggest producer of sugar, and its biggest consumer, which means its policy decisions have a major impact on the global market, which this year is awash with supplies from Brazil and Thailand.

"The decision should relieve pressure on the Indian domestic market, but the immediate impact on the global market is evident: both whites and raws sustained further falls after the announcement," said Tom McNeill, director of Green Pool, a commodities analyst based in Brisbane.

"Nonetheless, longer term this bodes well for an Indian sugar sector that is becoming a little more flexible and less likely to produce massive production swings every few years."

A severe drought in 2009 led India to import about 2 million tonnes after exporting the usual 5 million tonnes, which sent New York raw sugar futures rocketing to their highest level in nearly 30 years.

Graphic on India's sugar imports, exports:

link.reuters.com/xeg53s

The sugar sector in India is often dictated by cyclical swings. Lower output and higher prices trigger a rush to plant cane for the next crop season, leading to a glut every third year and forcing farmers to switch to other crops after that.

In the current year, output is expected to reach 26 million tonnes while domestic demand is seen at about 22 million tonnes.

Demand from the Middle East and Bangladesh ahead of the Muslim fasting month of Ramadan, which this year begins in July, may help absorb some of this surplus, and the lower global prices are likely to attract more bargain-hunters, traders said.

"We wouldn't be surprised to start to see consumers re-enter the sugar market at these levels to take advantage of the declines that we've seen over the past month and a half," said Luke Mathews, commodities strategist at Commonwealth Bank of Australia in Sydney.

Wednesday's decision by the Indian government followed a series of policy flip-flops and delays to implementing overseas sales, which have kept global markets on edge.

India has exported around 1.55 million tonnes out of the 2 million tonnes the government has already licensed in the 2011-12 season, according to the Indian head of commodities trader ED&F Man.

The government agreed to allow the export of another 1 million tonnes in March, giving a total for the season of 3 million tonnes, but has yet to finalise those shipments.

Farm Minister Sharad Pawar, a powerful ally of the coalition government, had urged the authorities to speed up the process, but the food ministry had dithered on an allocation mechanism.

In the physical market, Indian white sugar prices slipped to $570 to $580 a tonne from $610 last week because of more supply.

"India is offering a lot of sugar. I think they need to export sugar because they will get more money rather than selling it locally," said a dealer in Singapore, who trades Indian sugar.