The rupee on Thursday weakened by 31 paise to close at a nearly two-week low of 55.94 a dollar tracking weak trend in stocks amid a smart rise in the American currency overseas as fears over EU crisis deepened further.
Forex dealers said sustained dollar demand from importers also put pressure on the rupee while persistent capital inflows provided some cushion for the rupee.
The rupee resumed slightly better at 55.60 a dollar from previous close of 55.63 at the Interbank Foreign Exchange market.
It soon touched 55.53 on initial weakness in dollar value in early Asian trade on Thursday.
However, the trend turned negative as the rupee fell back to a low of 55.95 after mid-session on weakness in local shares amid a smart rebound in dollar in European trading.
The euro fell to a two-year low of $1.2175 against the dollar as investors fretted over the lack of progress in tackling the worsening EU debt crisis.
FIIs pumped in Rs 269 crore (Rs 2.69 billion) into local stocks on Thursday, which helped stem the rupee fall. The rupee finally closed at 55.94, a fall of 0.58 per cent.
On Wednesday, the currency had closed 24 paise down.
"The rupee extended its weakness for the second straight session breaching recent lows mostly tracking the weakness in global currencies which hit over two-year lows against USD," said Pramit Brahmbhatt,CEO, Alpari Financial Services (India).
Experts also feel that the recent strength in US dollar is on account of global risk-aversion
"Looking at the dollar index, it has rallied drastically from 83.09 seen at the start of the week to 83.75 levels.
"This reflects the increasing demand of safe haven on account of risk aversion across the global markets," said Abhishek Goenka, Founder & CEO, India Forex Advisors.
Meanwhile, the Indian stock market benchmark Sensex tumbled by 256.59 points or 1.47 per cent.
The premium for the forward dollar continued to rule weak on sustained receivings by exporters.
The benchmark six-month forward dollar premium payable in December moved down further to 164-166 paise from overnight close of 168-170 paise.
The premium for far-forward contracts maturing in June also declined to 303-305 paise from 308-310 paise.
The RBI fixed the reference rate for the US dollar at 55.6985 and for euro at 68.1465.
The rupee recovered against the pound sterling to end at 86.34 from Wednesday's close of 86.62 and also recouped to 68.10 per euro from 68.30 previously.
However, it dropped further against the Japanese yen at 70.52 per 100 yen from last close of 70.19.
