Updates to add trader comment in para 6-7, graphics

By Jaspreet Kalra

MUMBAI, May 11 (Reuters) - The Indian rupee endured its sharpest drop in more than a month on Monday to end at it weakest closing level on record as a run-up in crude oil prices battered the currency after U.S. President Donald Trump rejected Iran's response to a U.S. peace proposal.

The rupee INR=IN fell nearly 0.9% to 95.31 per dollar in its steepest single-day drop since March 27, tracking losses in regional peers.

Brent crude rose 2.5% to $103.8 per barrel as shipping through the Strait of Hormuz, a key energy artery handling about a fifth of global oil and liquefied natural gas flows, remained paralysed.

India's benchmark equity index .NSEI fell 1.5% and government bonds slid, with the yield on the 10-year benchmark jumping 6 basis points.

Over the weekend, Indian Prime Minister Narendra Modi urged a series of measures, including fuel conservation, fewer imports and gold purchases, as well as reduced travel, as a surge in energy ​prices takes a toll on the country's foreign exchange ​buffers.

The remarks about reducing gold purchases sparked some degree of panic among bullion importers who bought dollars very heavily on Monday, a trader at a large private bank said.

This trader estimated that the scale of demand was manifold of the routine dollar demand seen from such firms. While in the past officials have raised import taxes on gold to slow demand, government officials on Monday denied that any such steps were under consideration.

OIL THREAT

Higher oil prices are a major risk for net energy importer India, threatening to widen the country's current account deficit, slow growth and stoke inflation.

"Structurally weak external funding conditions mean even a small widening of the current account deficit will continue to put pressure on the INR and FX reserves," analysts at ANZ said in a note.

India's foreign exchange reserves INFXR=ECI stood at $690.69 billion as of May 1, per central bank data.

While the reserves are adequate on traditional metrics, such as the number of months of goods imports they can cover, they have come off their record high of $728 billion hit in February, before the war began.

Elsewhere in global markets, the dollar index =USD was little changed, hovering just shy of the 98 mark while equity futures pointed to a steady start for stocks on Wall Street.