The BSE Sensex dropped on Monday, led by banks and energy conglomerate Reliance Industries, after a slew of sovereign rating downgrades in Europe dampened risk appetite globally and doused expectations for foreign fund inflows.

The losses were held in check by expectations for a sharp drop in inflation, which could pave the way for the RBI to ease monetary policy when it meets on January 24 after two years of tightening, traders said.

Engineering and construction conglomerate Larsen & Toubro (LART.NS) and truck and car maker Tata Motors (TAMO.NS) were also among the losers, falling more than 2 percent each.

Fertiliser companies bucked the trend and rose on media reports the government plans to raise prices of the most widely used urea by a steep 40 percent.

Chambal Fertilisers (CHMB.NS), Tata Chemicals (TTCH.NS), Rashtriya Chemicals & Fertilizers (RSTC.NS), Coromandel International (CORF.NS) and National Fertilizers (NAFT.NS) climbed by 0.8 to 8 percent.

At 10:32 a.m. (0502 GMT), the main 30-share BSE index was down 0.57 percent at 16,062.99 points, with 22 of its components in the red.

The S&P downgrade (in Europe) was expected to have a mild effect on our markets which is what we are seeing, said Ambareesh Baliga, chief operating officer at Way2Wealth.

Rating agency Standard & Poor's cut nine of the euro zone's 17 countries, including top-notch France and Austria, and said it would decide shortly whether to downgrade the euro zone's bailout fund.

The move rekindled concerns about the euro zone's debt crisis and could hit investor flows into risky assets such as emerging markets.

State Bank of India (SBI.NS) and HDFC Bank (HDBK.NS) dropped 1.3 percent and 2.2 percent respectively, while Reliance Industries was down 1.7 percent.

The main factors to watch out are the inflation numbers and also some large results later this week, Baliga said.

Inflation probably fell sharply to 7.50 percent in December after staying above 9 percent for a year, helped by easing food prices, economists polled by Reuters said. The data is due around noon (0630 GMT).

Baliga said while a cut in interest rates by the Reserve Bank of India is unlikely the cash reserve ratio -- the proportion of deposits that banks must keep with the RBI in cash -- could be reduced from 6 percent currently.

The 50-share NSE index was down 0.73 percent at 4,830.3. In the broader market, losers outpaced gainers 812 to 491 on total volume of about 173.3 million shares.

Liquor maker United Breweries (UBBW.NS), the UB Group's flagship company, rallied 5.6 percent after the Economic Times reported the group would consolidate its foreign alcohol assets ahead of an overseas listing of the brands.

STOCKS ON THE MOVE

* Cable operators Den Networks (DENN.NS) and Hathway Cable and Datacom (HAWY.NS) rose 9.46 percent and 11.3 percent respectively, after the Business Standard reported Reliance Industries (RELI.NS) has approached the companies to buy stakes as part of its strategy to reach consumer homes for its fourth-generation broadband services.

* Gas distribution companies fell for a second straight session on a media report the government has asked the petroleum regulator to determine marketing margins for natural gas on the basis of costs.

Sate-run gas utility GAIL (India) Ltd (GAIL.NS), Petronet LNG Ltd (PLNG.NS) and Indraprastha Gas Ltd (IGAS.NS) were down by 1 to 5.6 percent.

MAIN TOP THREE BY VOLUME

* Suzlon Energy on 9.5 million shares

* Jaiprakash Associates (JAIA.NS) on 9.57 million shares

* Unitech (UNTE.NS) on 3.57 million shares