By Shivangi Lahiri and Sameer Manekar

Nov 21 (Reuters) - Shares of Australian drone technology firm Droneshield DRO.AX tumbled 8% on Friday, deepening a two-week rout as stake sales by top executives, a contract disclosure error, and the abrupt exit of its U.S. head halted this year's unprecedented rally.

Droneshield's stock had surged about 800% till early October, driven by contract wins and robust earnings, bolstering the ASX Small Ordinaries Index .AXSO, which is headed for its best year since 2019, up around 17% gains.

But that unravelled too quickly and sharply as investors booked profits and ramped up short positions, sending its shares down 75% from a lifetime high hit on October 9, implying a loss of around A$4.3 billion ($2.77 billion) in market value.

Data from the securities regulator showed short positions on Droneshield have surged 62% over the last two weeks.

The sell-off accelerated in mid-November after the Sydney-based firm disclosed its top executives, including CEO Oleg Vornik and Chairman Peter James, had sold their holdings for an aggregate A$70 million over six days.

Additionally, the abrupt departure of its U.S. CEO, Matt McCrann, and an incorrect contract announcement that misclassified an existing U.S. order as new business heightened governance concerns and deepened doubts about a stock once favoured for rapid growth.

"Investors have lost confidence in the stock after the directors, including the CEO and the chairman, sold every single share," said Ron Shamgar, head of Australian equities at TAMIM Asset Management.

Hugh Lam, investment strategist at Betashares, said investors want clearer signs of contract wins, steadier governance, and tighter cash flow management before the stock can re-rate higher.

Droneshield also abruptly cancelled an investor call scheduled for Friday to reassure shareholders after the executive share disposals, local media reported. The company did not immediately respond to a Reuters request for comment.

($1 = 1.5521 Australian dollars)

(Reporting by Shivangi Lahiri and Sameer Manekar in Bengaluru; Editing by Rashmi Aich)

((shivangi.lahiri@thomsonreuters.comSameer.Manekar@thomsonreuters.com))