(Reuters) - The rupee erased all early gains to turn weaker in afternoon trade on Tuesday as dollar demand emerged from oil companies which offset comfort from positive domestic equities and euro, traders said. * Likely dollar buying for defence related payments also pressured the rupee, traders said. * At 1:40 p.m., the partially convertible rupee was at 49.14/15 per dollar, down from the day's high of 48.86 and from Monday's close of 48.975/985. * The euro was trading at $1.3645, compared with $1.3592 when the rupee closed on Monday and the index of the dollar against six major currencies was at 77.584 points versus 77.808 points on Monday. * The euro clung to nearly all of the previous day's huge gains after hopes for a new EU debt plan sparked a correction in a deeply bearish market, though sentiment remains fragile as European leaders have disappointed many times before. * The local benchmark share index was up 0.4 percent after rising as much as 1.31 percent in early trade. * Oil is India's largest import item and oil refiners are the biggest buyers of dollars in the local market. * Brent crude held near $109 on Tuesday on cautious optimism that European banks may avert a financial crisis after leaders promised a plan to resolve the region's debt woes while a strike in OPEC member Kuwait threatened exports. (Reporting by Aditya Phatak; Editing by Subhadip Sircar)

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