* CME live cattle futures rise following USDA report * Short-covering, fund buying lift CME hog futures By Theopolis Waters CHICAGO, Aug 26 (Reuters) - Chicago Mercantile Exchange feeder cattle futures closed sharply lower on Monday, with October down its limit of 3 cents per lb, as investors worried that high-priced corn may curb feedlot demand for young cattle, traders said. Corn prices at the Chicago Board of Traded spiked near their 40-cent daily price limit led by hot weather in the U.S. Plains that could hurt crops. Nearby CME feeder cattle contracts fell below moving average support levels, and then funds started to liquidate. Spot August feeder cattle closed at 154.400 cents, down 0.600 cent per lb and beneath the 10-day moving average of 154.72 cents. Most-actively traded September closed 2.525 cents lower at 154.125 cents. It settled below the 40-day moving average of 155.90 cents. October feeder cattle ended 3.000 cents lower at 155.850 cents. LIVE CATTLE GAIN ON REPORT CME live cattle closed higher after Friday's bullish U.S. Department of Agriculture cattle-on-feed report, said traders and analysts. The number of cattle placed in U.S. feedlots in July fell to a five-year low for the month as the smaller cattle herd and expensive feed resulted in fewer cattle for feedyards to draw from. "The gains in cattle futures today were all about the surprisingly low placement number in Friday's report," a trader said. Speculators bought deferred live cattle contracts with the view that costly-corn would cause ranchers to feed fewer animals and nourish them to lighter weights. CME live cattle rose despite tepid wholesale beef demand and steady, rather than higher, cash cattle returns late on Friday. Last Friday, cash cattle in Texas and Kansas moved at mostly $123 per hundredweight (cwt), and $125 in Nebraska. Packers are buying cattle for next week that will be shortened by one day because of the U.S. Sept. 2 Labor Day holiday. And grocers are close to filling their beef needs for Labor Day grilling promotions. Monday morning, the government quoted the wholesale choice beef price, or cutout, at $195.69 per cwt, down 50 cents from Friday. Select cuts fell 87 cents to $183.22. Investors are monitoring a heat wave in the central Midwest that might discourage weekend holiday cookouts. Spot August live cattle ended up 0.300 cent to 123.400 cents per lb. Most-actively traded October closed 0.450 cent higher at 127.150 cents. HOGS RALLY AS SHORTS COVER Mixed rather than lower cash hog prices stirred short-covering and encouraged CME hog futures buying, traders said. Some packers raised cash hog bids to fill the rest of this week's production schedule. The seasonal increase in supplies afforded other packers inventories into the middle of next week. The government on Monday morning quoted the average hog price in the western Midwest market up 91 cents per cwt from Friday to $91.22, and down $1.27 to $90.44 in the eastern region. Government data on Monday morning showed the wholesale pork price, or cutout, at $97.79 per cwt, 80 cents lower than Friday. October hogs finished 0.925 cent higher at 86.025 cents per lb while December ended up 0.825 cent at 83.075 cents.