Indian rupee weakens as local shares fall, oil eyed

* Rupee eases on expectations of more foreign fund outflows

* Rise in oil price back above $126 also weighs (Updates to early deals)

MUMBAI, July 25 (Reuters) - The Indian rupee <INR=IN> weakened on Friday morning as a sharp fall in the share market raised worries that foreign investors would sell more of their holdings and repatriate the funds.

At 10:39 a.m. (0509 GMT), the partially convertible rupee was at 42.2850/2950 per dollar, weaker than 42.13/14 at close on Thursday.

"The Asian stocks are down so even local shares are seen negative through the day, so there is some dollar buying taking place. Besides it is a correction for what happened in the past two days," said a chief dealer with a cooperative bank.

The rupee rose 1.4 percent in the previous two sessions after the ruling coalition won a vote of confidence in parliament, raising hopes it would revive stalled economic reforms.

India's main share index opened down 2.2 percent, extending the previous day's losses after a five-session rally, tracking weaker Asian stocks, with Reliance Industries leading the fall. See [.BO].

Asian stocks fell on Friday, halting a four-day rally, after weak U.S. housing and jobs data and volatility in the financial sector once again reminded investors of the fragile state of global economy. See [ID:nSP7985].

Foreign institutional investors have so far in 2008 sold a net $6.6 billion worth of India stocks, after buying a record $17.4 billion last year.