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By Catherine Bosley

MUMBAI, March 17 (Reuters) - The Indian rupee fell sharply to its lowest in six months on Monday, as worries about foreign investors repatriating their capital gripped the market after local stocks tumbled to their worst in nearly seven months.

The partially convertible rupee <INR=IN> ended at 40.72/73, off an early low of 40.84, its weakest since Sept. 6, according to Reuters data. It closed at 40.435/445 on Friday.

India's benchmark share index <.BSESN> slid 6 percent, with investors rattled by news of an emergency U.S. Federal Reserve discount rate cut and the distress sale of investment bank Bear Stearns <BSC.N>.

Stock markets across Asia also declined on Monday, with Japan's Nikkei <.N225> closing at its lowest in two-and-a-half years.

"This has been bearish for the rupee and we've seen demand (for dollars) from custodial banks and importers," said Agam Gupta, head of currency trading at Standard Chartered Bank, referring to banks doing business on behalf of overseas clients.

India, which imports nearly 70 percent of its crude oil, runs a current account deficit and outflows of foreign capital can put downward pressure on the rupee.

"So the trade flows against the rupee, they need to be funded by capital flows. If the equity markets are weak, that clearly weighs on the rupee more than it would on most other currencies," said Pradeep Khanna, head of trading at HSBC.

Overseas investors sold $364 million of Indian stocks last week, taking the outflow to about $3.5 billion this year, according to data provided by the stock market regulator.

Foreigners had bought $17.4 billion in local shares last year, causing the rupee to appreciate more than 12 percent against the dollar. (Editing by Ranjit Gangadharan) (([email protected]; Tel: +91 22 6636 9038; Reuters Messaging: [email protected])) Keywords: MARKETS INDIA RUPEE/