Indian rupee rises as Asian units gain

* Foreign banks unwind long dollar positions

* Stocks watched for further clues, say traders (Updates to mid-morning)

MUMBAI, March 6 (Reuters) - The Indian rupee strengthened after opening lower on Friday as gains in other Asian currencies against the dollar boosted sentiment even as the domestic stock market dropped more than 1.5 percent early.

At 10:40 a.m. (0510 GMT), the partially convertible rupee was at 51.65/68 per dollar, off a low of 51.87 and 0.2 percent stronger than its Thursday's close of 51.76/78. On Tuesday, the rupee had dropped to a record low of 52.20.

"The stock market would be watched for cues through the day. But foreign banks have been unwinding their long dollar positions today as other Asian currencies are also higher against the dollar," a dealer with a private bank said.

One-month offshore non-deliverable forward contracts PNDF were quoting at 51.90/52.0, weaker than than the onshore spot rate, but retreating from levels close to 52.5 seen in the previous sessions.

The dollar slipped against a basket of major currencies on Friday, retreating from a three-year peak hit this week as investors braced for data which is expected to show U.S. job losses accelerated last month. [USD/]

Most Asian currencies were higher against the dollar. For a snapshot see [EMRG/FRX]. The dollar index .DXY, a gauge of the U.S. unit's performance against the majors, was down 0.3 percent.

Indian shares .BSESN fell nearly 2 percent extending their slide as General Motors' (GM.N: Quote, Profile, Research) bankruptcy warning flared concerns about the health of the global economy and sent Asian markets lower. [.BO]

Foreign capital has been a key driver of the rupee. Overseas portfolio investors have sold a net $2.1 billion of shares in 2009, cutting their exposure to riskier assets amid the global economic crisis. That added to sales of more than $13 billion in 2008.