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MUMBAI, June 18 (Reuters) - Indian shares fell more than 1.5 percent on Wednesday, heading towards their biggest single-day fall since late January, on concerns about the impact of higher oil prices on inflation and the government's finances.
The Indian rupee slid 0.6 percent against the U.S. dollar and bonds also weakened.
Brent crude held above $113 per barrel on Wednesday as heavy fighting in Iraq shut the country's biggest refinery and led to the withdrawal of staff by foreign oil firms, stoking worries about exports from the key oil producer.
India imports 80 percent of its oil requirements and higher oil prices could make things more complicated for Prime Minister Narendra Modi who won last month's elections on promises of lower price rise, faster economic growth and new jobs.
"They have got hold of one refinery. Surging oil would either eat into India's balance sheet or fuel inflation. It may make life difficult for new govt and the RBI," said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance.
Asia's third-largest economy imports nearly 4 million barrels per day (bpd) of crude oil - of which more than half a million bpd come from Iraq.
India's government expects oil prices to rise as high as $120 per barrel for several months because of fighting in Iraq, potentially driving a hole of at least 200 billion rupees ($3.3 billion) in the budget, two government sources told Reuters.
The BSE benchmark index fell as much as 1.6 percent to 25,114.3 points, while the NSE index fell 1.5 percent to 7,515.5, after earlier rising 0.3 and 0.4 percent, respectively.
The rupee touched a low of 60.43 to the dollar compared with its previous close of 60.03/04 and the 10-year benchmark bond yield rose 6 basis points on the day to 8.66 percent.
High oil prices and the recent spike in food inflation have pushed back hopes of interest rate cuts which added to the negative sentiment in bonds.
Among oil refiners, Bharat Petroleum Corp fell 4 percent, Hindustan Petroleum Corp lost 4.5 percent and Indian Oil Corp slumped 3.9 percent.
Oil explorers also fell on worries about a higher subsidy burden as crude oil jumps. Oil and Natural Gas Corp fell 1.4 percent while Oil India lost 0.4 percent.
In other blue-chips, HDFC Bank fell 1.8 percent while Larsen & Toubro lost 1.7 percent. (Editing by Kim Coghill)