* Rupee rises on hopes of interest rate cut * Dollar demand from foreign banks, stocks fall hurt * Drop in oil prices helps rupee sentiment (Updates to close) By Swati Bhat MUMBAI, Dec 5 (Reuters) - The Indian rupee gained on Friday as expectations grew of a weekend interest rate cut to reinvigorate a flagging economy, while falling crude oil prices eased concerns the trade deficit would widen. The partially convertible rupee closed at 49.57/58 per dollar, off its low of 49.95, and 0.6 percent stronger than its previous close of 49.87/89. On Tuesday, it had hit a record low of 50.65. "Rupee gained on hopes of an interest rate cut, but there was some dollar buying by some foreign banks likely on behalf of their customers," said Naveen Raghuvanshi, an associate vice president with Development Credit Bank. He said losses in the local share market also helped pull the rupee from its high. Indian shares .BSESN fell 2.9 percent with investors unsure how much an economic stimulus package, due to be unveiled on Saturday, would help salvage sluggish spending and falling manufacturing activity. See [.BO]. Foreign fund outflows from Indian shares so far in 2008 have reached a net $13.7 billion, a key factor in the rupee's more than 20 percent drop. Last year, record inflows of $17.4 billion helped the rupee gain more than 12 percent. Oil steadied around $44, not far off its lowest level in almost four years, as financial markets awaited U.S. jobs data for clues to the state of demand in the world's biggest oil. See [.BO]. It has now fallen more than $100 from July's record peak. India's central bank governor, Duvvuri Subbarao, will address a news conference at noon (0630 GMT) on Saturday, the Reserve Bank of India said in a statement on Thursday. The impact of the global financial crisis has been more severe on India than expected, Subbarao said, further hobbling already slower expansion in Asia's third-largest economy after interest rates were hiked to deal with surging inflation. Last week's attacks in the financial capital, Mumbai, delivered another blow to investor confidence and strengthened expectations the Reserve Bank of India would cut rates. "In case the rate cut does come through there would be some sell-off in the dollar-rupee, but in case it does not, then we are in for some trouble," Raghuvanshi said. "The rupee could open at 49.25-30 levels on Monday if the rate cut does happen". "If it does not, the rupee could weaken to 49.95 levels". (Editing by Mark Williams)

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