The rupee fell on Monday, tracking weak domestic shares ahead of the crucial December inflation data, with a weak euro adding to the decline.

At 10:20 a.m. (0450 GMT), the rupee was at 51.64/67 to the dollar. It had strengthened 2.29 percent last week, its biggest weekly gain in more than two months, to 51.5350/5450.

The euro weakness has extended to the rupee and the currency is also taking cues from the mildly weak domestic equities, said Subramaniam Sharma, Director, Greenback Forex.

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 euro hit a fresh 11-year low versus the yen on Monday and was expected to remain under pressure after the S&P's mass downgrade of euro zone countries late last week.

The BSE Sensex was weak in trade in early trades on global cues, but investors awaited monthly inflation due around noon (0630 GMT), which would be a key input for the central bank's policy review on January 24.

Headline inflation for December probably fell to 7.50 percent, economists polled by Reuters said, helped by a drop in food prices, after remaining above 9 percent for a year.

The inflation data will be a big driver as lower inflation data could trigger a possible rate cut in the January 24 policy review, Sharma said.

The market is expecting the headline inflation number to be between 7.00 and 7.5 percent, he said.

If that happens, we may see that in the second half of the trading day, equities may rally and rupee may come off from its weakness towards 51.50, he said.

Traders expect the rupee to trade in a 51.40 to 51.90 band to the dollar during the day.

RBI SUPPORT SEEN

Recent RBI measures to clamp down on speculation and dollar sales could keep the currency supported, traders said.

After the recent RBI measures, the speculation in the market has decreased sharply, with very few tools available with participants to speculate, said Ashtosh Raina, head of forex trading at HDFC Bank.

The Reserve Bank of India recently reduced the net overnight open position limit (NOOPL) of authorised dealers in the foreign exchange market, potentially reducing capacity of market participants for taking trading positions.

The central bank has also been intervening more actively in the foreign exchange market in recent months to curb the rupee's losses. RBI sold a net $2.92 billion in November, its highest dollar sales in over two-and-half years.

RBI has shown its presence at every level and with any uptick it is seen willing to sell, making the market jittery to go long (dollars), Raina added.

One-month offshore non-deliverable forward contracts were quoted at 51.67, indicating some weakness in the short-term in the onshore spot rate.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were all around 51.91 on total volume of $738 million.