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US STOCKS-Futures drop as short squeeze worries resurface

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* Futures down: Dow 0.43%, S&P 0.58%, Nasdaq 0.92%

Jan 29 (Reuters) - U.S. stock index futures fell on Friday as worries of a short squeeze resurfaced after an army of amateur investors trading in GameStop and other hot stocks pitted small investors against short-selling hedge funds.

The S&P 500 and the Nasdaq were on course for their worst weekly performance in two weeks, while the blue-chip Dow was tracking its biggest weekly fall since the end of October.

Big hedge funds rushed to cover losses after retail investors bought into shares of companies including GameStop Corp, AMC Entertainment Holdings Inc and BlackBerry Ltd.

The companies surged in premarket trading after Robinhood and Interactive Brokers said they planned to ease restrictions, a day after imposing buying halts.

Popular long positions in some stocks including Apple Inc were sold off by hedge funds recently to cover billions of dollars in losses.

Shares in Apple, Inc, Microsoft Corp , Facebook Inc, Netflix Inc, Tesla Inc and Alphabet Inc fell between 0.5% and 1.3%.

Better-than-expected quarterly earnings reports and hopes of a speedy economic recovery under the Biden Administration, on the back of massive fiscal and monetary stimulus program have helped Wall Street’s main indexes trade at record levels recently.

However, concerns over stretched valuations, rising coronavirus cases and new variants of the virus have kept investors on edge about a pullback and an increase in volatility in the near-term.

The first known U.S. cases of the South African COVID-19 variant, found to be partly resistant to current vaccines and antibody treatments, was detected in two South Carolina patients on Thursday.

“The market is adjusting to the reality that this crisis is not likely to be over by the end of the first quarter, and this resetting of expectations is inevitably having an impact on sentiment,” said AJ Bell Investment Director Russ Mould.

“Often the market will overshoot, as it arguably did on the positive side on vaccine breakthroughs last year, so there is a chance its perspective might at some point become gloomier than necessary.”

At 6:54 a.m. ET, Dow e-minis were down 131 points, or 0.43%, S&P 500 e-minis were down 22 points, or 0.58%, and Nasdaq 100 e-minis were down 121.5 points, or 0.92%.

Eli Lilly and Co rose 1.4% after the drugmaker posted a 41.5% rise in fourth-quarter profit, on higher demand for its diabetes drugs and a successful launch of its COVID-19 antibody treatment. (Reporting by Devik Jain and Shreyashi Sanyal in Bengaluru; Editing by Shounak Dasgupta)