(Updates to add detail, comment from analyst, dollar reaction)...

(Updates to add detail, comment from analyst, dollar reaction)

WELLINGTON, Sept 7 (Reuters) - International milk prices rose in the overnight Global Dairy Trade auction as the dairy sector continues to show signs of improvement.

The GDT Price Index, which covers a variety of products and contract periods, climbed 7.7 percent, with an average selling price of $2,920 per tonne, in the auction held on Tuesday.

Whole milk powder, which makes up the bulk of the auction, rose 3.7 percent while skim milk powder rose 10.0 percent.

"While it may still be a little early to say dairy commodity prices are recovering, fundamentals are pointing towards a continued improvement in the sector," said AgriHQ Dairy Analyst Amy Van Ossenbruggen.

Until recently, dairy was the backbone of New Zealand's economy, representing around 25 percent of exports. But dairy prices have dropped sharply from their record highs in 2013, due to China's economic slowdown and global oversupply.

Sliding prices have put farmers under pressure, with more than 85 percent estimated to be operating below breakeven levels.

The New Zealand dollar benefited from the result and was trading at 0.7415 early in New Zealand. The auction tends to impact the Kiwi given the sector's weight in the economy.

A total of 36,748 tonnes was sold at the latest auction, falling 2.7 percent from the previous one.

The auctions are held twice a month, with the next one scheduled for September 20.

The auction platform was set up by Fonterra, the world's largest dairy exporter, and is operated by trading manager CRA International.

Participants include Fonterra, Amul, Arla Foods, Arla Foods Ingredients, Dairy America, Euroserum and Murray Goulburn. Products traded on the twice-monthly auction include whole milk powder, skim milk powder, butter, cheese, and anhydrous milk fat, among others.