According to the Foods and Nutrition Encyclopedia, the earliest cultivation of cotton in the Americas occurred in Mexico, some 8,000 years ago. The indigenous species was Gossypium hirsutum, which is today the most widely planted species of cotton in the world, constituting about 89.9% of production worldwide. The greatest diversity of wild cotton species is found in Mexico, followed by Australia and Africa.
Cotton was first cultivated in the Old World 7,000 years ago (5th–4th millennia BC), by the inhabitants of the Indus Valley Civilization, which covered a huge swath of the northwestern part of the South Asia, comprising today parts of eastern Pakistan and northwestern India. The Indus cotton industry was well developed and some methods used in cotton spinning and fabrication continued to be used until the modern industrialization of India. Well before the Common Era, the use of cotton textiles had spread from India to the Mediterranean and beyond.
Greeks and the Arabs were not familiar with cotton until the Wars of Alexander the Great, as his contemporary Megasthenes told Seleucus I Nicator of “there being trees on which wool grows” in “Indica”.
According to The Columbia Encyclopedia, Sixth Edition:
Cotton has been spun, woven, and dyed since prehistoric times. It clothed the people of ancient Pakistan, India, Egypt, and China. Hundreds of years before the Christian era, cotton textiles were woven in India with matchless skill, and their use spread to the Mediterranean countries.
In Iran (Persia), the history of cotton dates back to the Achaemenid era (5th century BC); however, there are few sources about the planting of cotton in pre-Islamic Iran. The planting of cotton was common in Merv, Ray and Pars of Iran. In the poems of Persian poets, especially Ferdowsi’s Shahname, there are references to cotton (“panbe” in Persian). Marco Polo (13th century) refers to the major products of Persia, including cotton. John Chardin, a French traveler of 17th century, who had visited the Safavid Persia, has approved the vast cotton farms of Persia.
In Peru, cultivation of the indigenous cotton species Gossypium barbadense was the backbone of the development of coastal cultures, such as the Norte Chico, Moche and Nazca. Cotton was grown upriver, made into nets and traded with fishing villages along the coast for large supplies of fish. The Spanish who came to Mexico and Peru in the early 16th century found the people growing cotton and wearing clothing made of it.
During the late medieval period, cotton became known as an imported fiber in northern Europe, without any knowledge of how it was derived, other than that it was a plant; noting its similarities to wool, people in the region could only imagine that cotton must be produced by plant-borne sheep. John Mandeville, writing in 1350, stated as fact the now-preposterous belief: “There grew there [India] a wonderful tree which bore tiny lambs on the ends of its branches. These branches were so pliable that they bent down to allow the lambs to feed when they are hungrie.” This aspect is retained in the name for cotton in many European languages, such as German Baumwolle, which translates as “tree wool” (Baum means “tree”; Wolle means “wool”). By the end of the 16th century, cotton was cultivated throughout the warmer regions in Asia and the Americas.
India’s cotton-processing sector gradually declined during British expansion in India and the establishment of colonial rule during the late 18th and early 19th centuries. This was largely due to aggressive colonialist mercantile policies of the British East India Company, which made cotton processing and manufacturing workshops in India uncompetitive. Indian markets were increasingly forced to supply only raw cotton and were forced, by British-imposed law, to purchase manufactured textiles from Britain.

(Source: www.wikipedia.com )