Indian shares falter ahead of derivatives expiry; Sesa falls

* BSE index closes down 0.32 pct; NSE index falls 0.26 pct

* Sesa Sterlite falls after federal police begins probe

* Profit-booking ahead of derivatives expiry weighs on blue chips

By Himank Sharma

MUMBAI, Dec 24 (Reuters) - Indian shares fell on Tuesday after two sessions of gains as investors booked profits in recent outperformers such as ONGC and Tata Motors ahead of derivatives expiry later this week.

The expiry of derivatives on Thursday typically sparks volatile trading. This month will also mark the end of the quarter and the calendar year. Markets are closed on Wednesday for the Christmas holiday.

Still, broader sentiment remains underpinned by strong buying by foreign institutional investors even after the Federal Reserve last week announced the start of a reduction in bond purchases.

FIIs bought 1.35 billion rupees ($21.8 million) of Indian shares on Monday, according to exchange and regulatory data, bringing their total over the three sessions since the Fed decision to $514.2 million, as global markets have extended gains.

"FIIs are the dominant players and going into the holiday season volumes are likely to remain thin, so we don't expect too much of a movement in the next few days," said Aneesh Srivastava, chief investment officer of IDBI Federal Life Insurance Co Ltd.

"Going into the New Year there would be increased volatility, but our expectation is for interest rate to turn around, which would be a net positive."

The benchmark BSE index closed down 0.32 percent at 21,032.71, after gaining 1.9 percent in the previous two sessions. The broader NSE index fell 0.26 percent to 6,268.40.

Some recent outperforming blue chips fell, with Tata Motors Ltd down 0.8 percent after gaining 2.4 percent over the previous four sessions.

Oil and Natural Gas Corp (ONGC) fell 1.1 percent after rallying 5.5 percent over the previous four sessions.

Shares of Sesa Sterlite Ltd, controlled by billionaire Anil Agarwal, closed down 2.28 percent after India's top investigating agency said it started a probe into possible irregularities in its stake buy in Hindustan Zinc Ltd (BSE: HINDZINC.BO - news) back in 2006.

Hindustan Zinc, in which Agarwal's Vedanta Resources PLC (Other OTC: VDNRF - news) has a 64.9 percent stake, closed lower 2.15 percent.

However, among gainers, Infosys Ltd (NYSE: INFY - news) , which fell 2.3 percent on Monday after a top executive resigned, closed higher 0.52 percent on bargain-buying.

Shares in Apollo Tyres Ltd (BSE: APOLLOTYRE.BO - news) ended up 7.9 percent after rising to their highest since September 2012 as investors bet the Indian company will drop its $2.5 billion deal to buy U.S.-based Cooper Tire & Rubber Co (NYSE: CTB - news) .

For additional stocks on the move double click

FACTORS TO WATCH * Dollar edges higher on strong U.S. economy outlook * Brent steadies above $111 on South Sudan conflict * Equities buoyed by Nikkei high, dollar edges up * Foreign institutional investor flows * For closing rates of Indian ADRs

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 Asia Macro data