* Morgan Stanley cuts emerging market position
* Carmakers, constructions cos, banks lead fall
* Fuel retailers rise on subsidy report
* Tata Steel reverses falls on bullish outlook (Updates to close)
By Henry Foy
MUMBAI, Feb 10 (Reuters) - Indian shares closed down 0.46 percent on Friday, reversing early gains, after data showed the country's industrial output in December slowed sharply and Morgan Stanley cut its allocation for emerging market stocks.
India's industrial output grew just 1.8 percent in December, its slowest in two months, as sluggish global growth, tight monetary policy from the country's central bank and government policy paralysis stifles economic growth.
Shares in carmakers, construction companies and banks all fell, as the less-than-forecast figure confirmed fears of slowing economic growth in the country.
Morgan Stanley will scale back its position in emerging and Asian stocks from the maximum "overweight," the investment bank said in a report released on Friday. It was the bank's first downgrade in stance on emerging markets since October, 2010.
"The output was worse than expected, and the market took a hit on Morgan Stanley's cut in allocation for emerging markets, which will likely see foreign inflows fall," said Hitash Dang, vice president at Jaypee Capital.
"But the highlight of today was Tata Steel, even given their bad results, which shows the underlying positive appetite in the market."
Foreign funds have invested more than $3.6 billion in local equities so far this year, data from the Securities and Exchange Board of India showed. In 2011, they were net sellers of about $500 million.
The main 30-share BSE index fell 82.06 points to end at 17,748.69, with 22 of its components losing value. The benchmark index was up 0.3 percent before the industrial output data was released.
Tata Steel, the world's No. 7 producer of the alloy, was the benchmark index's best performer on Friday, as investors reversed early falls on news that the company expected rising domestic sales in the coming fiscal year.
Shares in Tata Steel closed up 5.1 percent at 475.05 rupees ($9.60).
State-run Indian oil companies' shares rose a day after news that the country's finance ministry would reimburse the retailers with 150 billion rupees as a subsidy for below-market price sales in the quarter to December.
Hindustan Petroleum Corp Ltd shares closed up 2.2 percent at 294 rupees, while shares in Indian Oil Corp ended up 1.5 percent at 275.70 rupees. Shares in Bharat Petroleum Corp closed little changed at 598.20 rupees, after rising as much as 4.9 percent.
Top automaker Maruti Suzuki lost 2.0 percent to close at 1,244.60 rupees, and rival Mahindra & Mahindra shed 1.5 percent to close at 691.55 rupees.
Shares in India's biggest banks fell on news of slowing industrial output. The sector index closed down 0.7 percent.
Shares in the country's top lender State Bank of India fell as much as 1.6 percent, before closing at 2,171,90 rupees, a fall of 0.6 percent. Shares in ICICI Bank closed down 1.0 percent at 930.45 rupees after falling as much as 4.9 percent.
The 50-share NSE index ended 0.57 percent lower at 5,381.60 points. In the broader market, gainers led losers by a ratio of about 4:3 on a larger than average volume of almost 1 billion shares.
Global stocks fell on Friday as safe-haven government bonds rose, as the final approval of a long-awaited Greek debt deal remained elusive and kept alive the threat of a messy default.
In Asia, the MSCI's broadest index of Asia Pacific shares outside Japan was down 1.6 percent at 15:30 p.m. (1000 GMT), while Japan's Nikkei had closed down 0.6 percent.
STOCKS THAT MOVED
* Jindal Stainless shares closed down 4.5 percent after the steelmaker reported a December-quarter loss of 1.1 billion rupees.
* Shares in Numeric Power Systems Ltd closed up 20 percent, their maximum daily increase, after the company agreed to sell its UPS business for 8.37 billion rupees.
* Dion Global Solutions shares closed up 4.9 percent after Mahindra Satyam said it will buy a strategic stake in the company.
TOP 3 BY VOLUME
* IFCI on 55.1 million shares
* Suzlon Energy on 41.5 million shares
* Unitech on 22.3 million shares
FACTORS TO WATCH * India bond report * India rupee report * Euro off 2-month highs, Greece worries linger * Brent drops below $118, China data stokes demand fears * Stocks, euro hit by Greek uncertainty * Greek deal leads to modest gains on Wall Street * For closing rates of Indian ADRs * For Foreign institutional investor flows
(Additional reporting Sanjeev Choudhary in NEW DELHI; Editing by Aradhana Aravindan)
ASIA-PACIFIC STOCK MARKETS: Pan-Asia........ Japan....... S.Korea... S.E. Asia....... Hong Kong... Taiwan.... Australia/NZ.... India....... China.....
OTHER MARKETS: Wall Street .... Gold ....... Currency.. Eurostocks..... Oil ........ JP bonds... ADR Report ..... LME metals. US bonds.. Stocks News US.. Stocks News Europe
DIARIES & DATA: Indian Data Watch Asia earnings diary U.S. earnings diary European diary Indian diary Wall Street Week Ahead Eurostocks Week Ahead
TOP NEWS: For top Asian company news, double click on: U.S. company news European company news Forex news Global Economy news Technology news Telecoms news Media news Banking news Politics/General news Asia Macro data A multimedia version of Reuters Top News is available at: topnews.session.rservices.com
LIVE PRICES & DATA: World Stocks Currency rates Dow Jones/NASDAQ Nikkei FTSE 100 Debt Indian rupee LME price overview (Reporting by Henry Foy; editing by Malini Menon)