The BSE Sensex fell more than 2 percent on Thursday, weighed down by renewed concerns about slowing growth and the government's inability to pursue reforms and help retrieve the ground.
Automakers such as Maruti Suzuki (MRTI.NS) and Tata Motors (TAMO.NS) were among the losers after an industry body said carmakers may just break even this year and warned it would cut its sales outlook.
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.
Investors and entrepreneurs are frustrated because of the inaction of the government, said Deven Choksey, chief executive and managing director of brokerage K.R.Choksey. This is definitely not good for the markets.
Top listed retailer Pantaloon Retail (PART.NS), which has been hoping to tie up with foreign giants, fell more than 4 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 Trent Ltd (TREN.NS) fell 5 percent and 2.4 percent.
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.
A larger amount of nervousness is also because people are not very sure about the outcome of the European Union summit, Choksey said.
At 11:38 a.m. (0608 GMT), the 30-share BSE index was down 1.85 percent at 16,564.79 points, after falling as much as 2.3 percent at one stage. All but two of its components were in the red.
Brokerage CLSA on Thursday lowered its 12-month target for the benchmark to 17,000 from 18,200, citing earnings cuts for FY12 and FY13.
Maruti Suzuki, Tata Motors and Mahindra & Mahindra (MAHM.NS) shed 1.3 to 2.4 percent, pulling the BSE auto index down 1.4 percent.
Slowing growth and rising subsidy bill are seen impacting the country's fiscal deficit, Finance Minister Pranab Mukherjee said late on Wednesday.
If you look at domestic factors, fiscal deficit is a concern and deferment of FDI has added to the worries, Kishor Ostwal, chairman and managing director at CNI Research, said.
Lenders State Bank of India (SBI.NS) and ICICI Bank (ICBK.NS) fell 3 and 2.8 percent respectively, while state-run Coal India (COAL.NS) dropped 2.8 percent.
The broader 50-share NSE index .NSEI was down 2.09 percent at 4,957.0 points. In the broader market, there were 4.9 losers for every gainer with 264.6 million shares changing hands.
Elsewere, the MSCI's measure of Asian markets other than Japan was down 0.84 percent as doubts set in about whether European leaders can agree on a plan to tackle the euro zone's two-year-old debt crisis.
STOCKS ON THE MOVE
* Mobile operator Idea Cellular (IDEA.NS) fell more than 3 percent to 88.6 rupees after Credit Suisse downgraded the stock to 'underperform' from 'buy' and cut its target price to 80 rupees from 115 rupees.
The brokerage said the potential impact from recent regulatory proposals such as pricing of second-generation spectrum and mergers and acquisitions could have a significant impact on Idea, compared with larger peers.
* Crompton Greaves (CROM.NS) fell 3 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.
MAIN TOP 3 BY VOLUME
* Suzlon Energy (SUZL.NS) on 7.15 million shares
* GVK Power (GVKP.NS) on 6.72 million shares
* Jaiprakash Associates (JAIA.NS) on 6.05 million shares