(Reuters) - The rupee weakened on Friday as dollar demand for defence purchases and some unwinding of short Euro Asia positions in the non-deliverable forwards market weighed. The partially convertible rupee closed at 46.80/81 per dollar, off the day's low of 46.8350 but still 0.4 percent weaker than Thursday's closing of 46.60/61. The unit dropped 0.3 percent on the week. "The dollar-rupee was very rangebound today. There was some defence related dollar purchases in the morning, looks like there was a bit of dollar selling towards the end with forward premiums also coming off the day's highs," said Nitesh Kumar, an inter-bank dealer with Development Credit Bank in Mumbai. The onshore dollar premiums had edged higher earlier in the day as liquidity in the banking system continued to stay tight, while traders also braced for a possible rate hike at the upcoming monetary policy review on July 27. The one-year onshore dlr premium rose to as much as 160.75 points before closing at around 155.75 points. It had closed Thursday at 154.25 points. Mild gains in the stock market prevented the unit from slipping sharply, dealers said. Indian shares rose for the second week and closed 0.3 percent higher, propped up by gains in Tata Consultancy Services as brokerages cheered the top outsourcer's forecast-beating quarterly earnings by raising their target prices. Foreign fund flows into and out of the stock market have a influence on the rupee's fortunes. So far in 2010, foreigners have purchased a net $8.4 billion worth of shares, adding to last year's record $17.5 billion inflows. Dealer said there was some contract settlement due in the non-deliverable forwards market which caused the sell-off in the spot rupee as traders unwound their short Euro/Asia positions that had been built earlier. One-month offshore non-deliverable forward contracts were quoted at 46.99, weaker than the onshore spot rate, suggesting a bearish near-term outlook. Traders said the dollar's losses against majors failed to lift up the rupee, but was critical in averting a further sell-off. The dollar's index against six major units was down 0.3 percent. The euro touched a fresh two-month high versus a broadly weaker dollar on Friday as rising European money market rates continued to underpin the shared currency, bringing large option barriers into play. In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 46.8450 and 46.84 respectively, with the total traded volume on the two exchanges at about $3.6 billion.

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