The rupee pared its initial gains and settled down by 9 paise at 81.35 (provisional) against the US dollar on Friday as the support from weak dollar was negated by weak domestic markets and a surge in crude oil prices.

Forex traders said foreign fund outflows also weighed on investor sentiments.

At the interbank foreign exchange market, the local unit opened at 81.11, but pared the gains and ended at 81.35, down 9 paise over its previous close.

During the day, the local unit witnessed an intraday high of 81.08 and a low of 81.35. On Thursday, the rupee appreciated by 4 paise to close at 81.26 against the US dollar.

"Weak US Dollar index supported the rupee. However, weak domestic markets, a surge in crude oil and FII outflows capped sharp gains," said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.

The US Dollar declined as US ISM manufacturing PMI slipped into contraction and positive riskier currencies such as Euro and Pound. Euro surged as the German trade surplus topped street estimates.

"We expect the Rupee to trade with a slight negative bias on risk aversion in global markets and fresh outflows by FIIs. However, softness in the greenback may support Rupee at lower levels. Markets may also take cues from US non-farm payroll data today evening, wherein it is expected to show a slower pace of hiring," Choudhary added.

The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.18 per cent to 104.53.

Global oil benchmark Brent crude futures rose 0.17 per cent to USD 87.03 per barrel.

Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Thursday as they offloaded shares worth Rs 1,565.93 crore, according to exchange data.

On the domestic equity market front, the 30-share BSE Sensex fell 415.69 points or 0.66 per cent to end at 62,868.50, while the broader NSE Nifty advanced 116.40 points or 0.62 per cent to 18,696.10.