* BSE Sensex at fresh 7-month closing lows
* Anil Ambani Group accuses rivals of planting rumors
* M&M gains 4.1 pct as Dec qtr net jumps 79 pct
(Updates to close)
By Ami Shah
MUMBAI, Feb 9 (Reuters) - Indian shares dropped 1 percent to fresh seven-month closing lows on Wednesday, dragged by a sharp late selloff in companies controlled by billionaire Anil Ambani.
World stocks also were subdued as investors digested China's interest rate hike on Tuesday, its second in just over six weeks, as it intensified its battle against inflation.
Reliance Infrastructure (RLIN.BO) plunged the most and eroded 18.8 percent, with more than 4 million shares traded on the BSE, which is nearly 12 times the average 30-day volume.
Reliance Communications (RLCM.BO) tumbled as much as nearly 18 percent to an all-time low of 90.80 rupees. It later recovered some losses and closed down 14.3 percent. Around 6 million shares exchanged hands, which is more than four times their average 30-day volume.
Other group companies Reliance Capital (RLCP.BO), Reliance MediaWorld RELM.BO, Reliance Power (RPOL.BO) dropped between 8.9 percent and 16.1 percent.
Reliance ADA Group blamed the sharp drop in its stocks on what it said was a series of "baseless and motivated rumors" spread by rivals, and said it had complained to the market regulator. [ID:nWNAS0882]
"We are as it is going through a phase of major crisis of confidence," said Prakash Diwan, head of institutional business at Networth Stock Broking, pointing to the weakness in the stock market.
"Rumors like these add to panic and are absorbed more faster in current situation when we are facing issues like corporate governance in the industry," he said, referring to the selloff in Anil Ambani stocks.
India has been rocked by a spate of corruption scandals in the last few months, hurting its image as an investment destination. [ID:nSGE71806N]
The 30-share BSE index .BSESN ended down 1.03 percent, or 182.93 points, to 17,592.77 points, its lowest close since early July. Twenty two of its components closed in the red.
"Things are very uncertain right now. Investors do not like this," said Gajendra Nagpal, CEO of Unicon Financial.
"We may some bounceback in the market after steep declines, but a sustained recovery is not likely any time soon."
Foreign funds have pulled out around $1.3 billion from Indian equities this year, as per the data from market regulator, pushing the main index down 14.2 percent.
Top utility vehicle maker Mahindra & Mahindra (MAHM.BO) raced 4.1 percent after it reported a 79 percent jump in quarterly profit as robust volumes in a fast-growing auto market mitigated higher raw material costs.[ID:nSGE71803L]
DB Realty (DBRL.BO) closed 5.9 percent lower after authorities arrested Managing Director Shahid Balwa in connection to a massive telecoms scandal that has crippled the government.
Balwa is also vice chairman of Etisalat DB, the Indian telecoms joint venture between Abu Dhabi's Etisalat ETEL.AD and DB Group. The stock fell as much as 20 percent early. [ID:nSGE71802W]
Shares in Unitech (UNTE.BO), India's second-largest listed realty company, fell as much as 10.5 percent to 36.90 rupees, its lowest since April 2009.
Last week, Unitech, whose Unitech Wireless joint venture is majority held by Norway's Telenor (TEL.OL) was among two companies accused by police of buying mobile licences at unfairly cheap prices.
Unitech denied that it had received any favours and said it had complied with rules, while Telenor said it had no reason to believe the licenses were issued improperly. [ID:nSGE71300Y]
Metal producers fell as London copper declined almost 1 percent after Beijing raised interest rates. [ID:nL3E7D90LF]
Non-ferrous metal producer Sterlite Industries STRL.BO and aluminium producer Hindalco (HALC.BO) ended down 2.9 percent and 6.2 percent, respectively.
Tata Steel (TISC.BO), the world's seventh-largest maker of the alloy, erased 3.4 percent.
Market breadth was weak with nearly five shares declining for every share that advanced on the BSE on a volume of 340 million shares, which is higher than the average 30-day volume of around 300 million shares
The 50-share NSE index .NSEI closed 1.1 percent lower at 5,253.55.
The MSCI world equity index .MIWD00000PUS was down 0.3 percent by 1043 GMT, while the emerging markets equity index .MSCIEF fell more than 1 percent.
STOCKS THAT MOVED
* State-run oil marketing company Bharat Petroleum (BPCL.BO) shed 2.5 percent to 584.20 rupees after its quarterly net profit declined 50 percent. [ID:nWNAS0873]
* United Spirits (UNSP.BO), the world's third largest spirits maker by volume, fell 2.8 percent at 1,059.85 rupees ahead of its quarterly earnings announcement.
* Tyre makers fell as rubber prices in international markets rose to a new record due to tight supply in producing countries [ID:nSGE71804Y]
Apollo Tyres (APLO.BO), Ceat (CEAT.BO), MRF (MRF.BO) and JK Tyre & Industries (JKIN.BO) shed between 5.1 percent and 9.7 percent.
MAIN TOP THREE BY VOLUME
* Lanco Infratech (LAIN.BO) on 17.3 million shares
* Marico (MRCO.BO) on 11.2 million shares
* Unitech on 9.8 million shares
FACTORS TO WATCH * For technical analysis click on www.reuterstechnicals.com * Indian rupee report [INR/] * Indian bond report [IN/] * Dlr supported by rising yields, China hike absorbed [FRX/] * Oil up; Brent/WTI spread at new record near $13/bbl [O/R] * Stocks slip after China hike; US yields higher [MKTS/GLOB] * U.S. shares set to open lower as rally flags [.N] * For closing rates of Indian ADRs INADR (Reporting by Ami Shah; Editing by Aradhana Aravindan)