The BSE Sensex fell 0.6 percent on Tuesday with many investors staying on the sidelines in the absence of policy initiatives by the government to reverse slowing growth.
Energy giant Reliance Industries (RELI.NS) and lenders State Bank of India (SBI.NS) and HDFC Bank (HDBK.NS) were among the big losers on concerns about the outlook for earnings.
Many investors have suffered losses and they are not in a position to take much risk. And, there is no clarity on the policy front, said D.D. Sharma, senior vice-president at brokerage Anand Rathi.
The main 30-share BSE index .BSESN closed down 96.80 points at 15,873.95, with 22 of its components declining. The benchmark, which rose 1.5 percent on Monday, seesawed through the day falling 1 percent at one stage.
The government has been caught in a policy gridlock with most reform measures being stalled and tight monetary policy to tame stubborn inflation has slowed economic growth.
Ravi Sharma, chief executive of Adani Power (ADAN.NS), said on Tuesday the company had put on hold its 6,500 megawatt expansion plan because of no clarity on coal supplies. The stock fell 1.5 percent.
While India holds 10 percent of the world's coal reserves, power companies often struggle to access local supplies due to environmental and land acquisition delays, forcing expensive imports.
The BSE index has fallen about 22 percent this year, making it one of the worst performing major index. Foreign funds have pulled out a net $470 million this year, compared with net inflows of more than $29 billion in 2010.
India's parliament began debating an anti-graft bill on Tuesday as Gandhian activist Anna Hazare renewed his anti-corruption protest in Mumbai to press for the early passage of a tough law.
There is resentment among people against corruption. But markets are unlikely to be impacted as long as the protest remains peaceful, said Arun Kejriwal, strategist at research firm KRIS.
State Bank of India, the country's largest lender, shed 1.3 percent, HDFC Bank dropped 0.9 percent and ICICI Bank (ICBK.NS) lost 0.5 percent.
There are concerns about asset quality of banks as borrowers face difficulty to repay loans following sharp increases in interest rates and dwindling economic growth.
Reliance Industries shed 1 percent to 753.05 rupees after JM Financial downgraded the company to 'hold' from 'buy' and cut target price to 850 rupees from 1,015 mainly due to reducing refining margins and lower-than-expected exploration and production volumes from its oil field off India's east coast.
Tata Consultancy Services (TCS.NS) and Infosys (INFY.NS) dropped 0.75 percent and 0.6 percent respectively on gloom over European economies, which contribute a significant chunk of revenue to India's showpiece $76-billion software services sector.
Larsen and Toubro Ltd (LART.NS) rose 0.3 percent after the engineering conglomerate said Japan's Mitsubishi Heavy Industries (7011.T) signed a pact to provide technology support to its L&T Shipbuilding unit.
Mobile operator Reliance Communications (RLCM.NS) gained 4.9 percent after India's telecoms commission accepted the sector regulator's recommendation on mergers & acquisitions rules by and large.
Top mobile operator Bharti Airtel (BRTI.NS) and smaller rival Idea Cellular (IDEA.NS) fell 0.5 and 2.7 percent respectively.
The 50-share NSE index fell 0.6 percent to 4,750.50. In the broader market, there were about 1.5 losers for every gainer on relatively lighter volume of about 387 million shares.
STOCKS THAT MOVED
Bharati Shipyard (BHAR.NS) closed up 6 percent at 72.45 rupees after the company said late on Monday that its board had approved a proposal to restructure 28.54 billion rupees worth of debt.
Movie exhibitors Fame India (FAME.NS), Inox Leisure (INOL.NS) and Cinemax India (CIMA.NS) rallied on hopes of better box office collection from recent releases. Fame closed up 20 percent at 42.20 rupees, while Inox gained 12 percent to 43.90 rupees. Cinemax gained 7.3 percent to 32.20 rupees.