* Stocks drop over 0.7 percent early; fund flows watched * Dollar index up 0.2 pct against majors; weighs on sentiment * Foreign funds buy about $16 bln worth of stx so far in 2009 (Updates to mid-morning) MUMBAI, Dec 4 (Reuters) - The Indian rupee fell on Friday, pulling back more than two-week highs in the previous session as weakness in the local sharemarket and a stronger dollar weighed on sentiment. At 10:10 a.m. (0440 GMT), the partially convertible rupee INR=IN was at 46.26/27 per dollar, 0.4 percent weaker than its Thursday's close of 46.07/08, which was its strongest since Nov. 16. "Rupee opened with a gap due to the strong dollar, market is now watching stocks for further direction," a senior dealer with a private bank said. "It is likely to trade in at 46.15-46.40 range today." Dealers said a further weakness in the Indian rupee could lead to receiving interest in the forwards, pushing premiums lower. One-month forward premium INR1M= was lower at 8.25 points, compared to 9.00 points on Thursday. Shares .BSESN fell more than 0.7 percent after weak U.S. data triggered concerns over the pace of economic recovery and pushed most Asian stocks lower. [.BO] Foreign portfolio flows of almost $16 billion into Indian equities this year have helped the rupee rise more than 13 percent from a record low of 52.2 in early March. The index of the dollar .DXY, against six major currencies, was up 0.2 percent. One-month offshore non-deliverable forward contracts INR1MNDFOR= was quoted at 46.17/27, little stronger than the onshore spot rate. (Reporting by Swati Bhat; Editing by Kazunori Takada) ((swati.bhat@thomsonreuters.com; +91-22-6636-7353; Reuters Messaging: swati.bhat.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

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