The BSE Sensex fell 2.3 percent on Thursday, its biggest slide in nearly three weeks, amid concerns about slowing growth and the government's inability to pursue reforms, and uncertainty over whether the eurozone can agree on how to resolve its debt crisis.
Traders said India's stock market would remain under selling pressure over the next one week on investor caution ahead of a slew of economic data.
The market will be quite volatile for the whole week starting today. There will be pressure on the downside, said R.K. Gupta, managing director of Taurus Asset Management. The market is playing in a very cautious zone and people would not like to take long positions because there are a lot of important issues coming up in the next five to six trading sessions, he added.
India's industrial output and inflation data are due next week, while the RBI will review monetary policy on December 16.
The 30-share BSE index closed down 2.3 percent -- its biggest single-day fall since November 21 -- at 16,488.24 points, after losing as much as 2.7 percent. All but five of its components were in the red. The benchmark, which is one of the world's worst performers this year, has fallen 19.6 percent since the start of the year.
Brokerage CLSA on Thursday lowered its 12-month target for the benchmark to 17,000 from 18,200, citing earnings cuts for the current fiscal year ending March and the next year.
Automakers were among the big losers after an industry body said they may just break even this year and warned it would cut its sales outlook. Tata Motors (TAMO.NS), Maruti Suzuki (MRTI.NS) and Mahindra & Mahindra (MAHM.NS) shed 1.3 to 3.6 percent, pulling the BSE auto index down 1.6 percent.
Rising finance costs and increasing prices have deterred buyers in Asia's third-largest economy in recent months, with car sales in April-November down 3.5 percent from the same period a year ago.
Worsening government finances and an announcement on Wednesday by the finance minister to suspend a policy decision to open the supermarket sector to foreign giants due to political opposition also hurt investor sentiment, traders said.
Top listed retailer Pantaloon Retail (PART.NS), which has been hoping to tie up with foreign giants, fell 5.8 percent after the government on Wednesday suspended plans to open its $450 billion supermarket sector to foreign firms.
Other retailers such as Vishal Retail (VIRL.NS) and Shoppers Stop Ltd (SHOP.NS) fell 6.2 percent and 1.36 percent.
Data showing India's annual food inflation slowed was offset by concerns the industrial output had declined for the month of October, said Ambareesh Baliga, chief operating officer at brokerage Way2Wealth Securities.
Doubts about whether a European Union summit on Friday would be able to tackle the region's debt problems also kept investors wary because the crisis could trigger foreign fund withdrawals from emerging markets such as India, dealers said.
Telecom stocks took a hit after downgrades on ratings of bluechip stocks in the sector. Credit Suisse downgraded telecom giant Bharti Airtel (BRTI.NS) to neutral from outperform and smaller peer Idea Cellular (IDEA.NS) to underperform from buy as regulatory risks had not been priced in.
India's telecoms market, the second-largest in the world after China, has struggled in recent years due to ferocious competition and a massive graft scandal, prompting authorities to overhaul the decade-old industry regulations.
Bharti and Idea fell 2.7 percent and 4.16 percent, respectively.
Infosys Ltd (INFY.NS) fell 1.3 percent after Bank of America Merrill Lynch downgraded the stock to neutral from buy, partly on greater exposure to discretionary IT spending.
The broader 50-share NSE index ended down 2.35 percent at 4,943.65 points. In the broader market, there were 3.6 losers for every gainer with 592.7 million shares changing hands.
The MSCI's measure of Asian markets other than Japan was down 0.75 percent.
STOCKS THAT MOVED
* Capital goods giants BHEL (BHEL.NS) and Larsen & Toubro (LART.NS) fell 5.7 percent and 5.4 percent, respectively after Barclays Capital said the sector was undergoing a cyclical deceleration in orders and earnings.
However, the sharp de-rating that has already occurred in valuations and earnings estimates moderates our bearish view, Barclays said.
* Crompton Greaves (CROM.NS) fell 3.6 percent after Morgan Stanley started coverage on the stock with an underweight rating and said it expects the firm's earnings to be under pressure for the next 12-18 months.
* Piramal Healthcare (PIRA.NS) rose 3.6 percent after the managing director of its unit told Reuters the company was expecting to sell its investments in two real estate projects with an estimated 20 percent internal rate of return.
MAIN TOP 3 BY VOLUME
* Suzlon Energy (SUZL.NS) on 20.87 million shares
* Unitech (UNTE.NS) on 20.86 million shares
* Jaiprakash Associates (JAIA.NS) on 20.3 million shares