The BSE Sensex fell for a third consecutive session on Thursday to their lowest close in more than a week as a weakening rupee added to the worries about fading outlook for corporate earnings.
Subdued global markets and Europe's economic woes also pushed investors to cut their exposure on concern the global risk-aversion sentiment could trigger more foreign fund withdrawals from emerging markets, traders said.
The main 30-share BSE index shed 1.17 percent, or 183.92 points, to 15,543.93, its lowest close since December 20. Twenty four of its components declined.
The benchmark has lost 2.7 percent over the past three sessions and is on track to post its biggest annual fall in three years, having dropped 24 percent since the start of January.
Energy major Reliance Industries (RELI.NS), which has been under pressure due to falling gas output from its field off the country's east coast, led the losses.
The stock dropped 3.7 percent to 711.90 rupees, its lowest close in more than 2 years.
Investors also dumped banks amid mounting concerns about bad loans as delays in projects and sharp increases in interest rates dented the ability of borrowers to repay loans.
The worry for the banking sector is on the provisioning side and not on the credit side, said Deven Choksey, chief executive officer at K.R. Choksey, adding, Because many infrastructure projects are either going slow or have been stalled for some reason, there will be an impact on the quarterly earnings for banks.
Top private-sector lender ICICI Bank (ICBK.NS) and smaller rival HDFC Bank (HDBK.NS) slipped 1.6 and 2.3 percent respectively.
The BSE's banking sector index has plunged near 30 percent year to date.
The rupee fell as much as 0.8 percent on concerns worsening European economy could accelerate foreign fund withdrawals from India.
Many companies that had borrowed overseas to beat high domestic rates are facing higher costs due to the rupee's slide. Risk-aversion among banks has also pushed up the cost of offshore debt.
Top car maker Maruti Suzuki (MRTI.NS) fell 3.9 percent, while truck, utility vehicle and car maker Tata Motors (TAMO.NS) shed 0.6 percent.
Export-focused software services bellwether Infosys (INFY.NS) fell 1.4 percent on concerns Europe's debt crisis could dent global technology spending.
The 50-share NSE index fell 1.27 percent to 4,646.25 with 38 of its components ending in red. In the broader market, there were 1.7 losers for every gainer on total volume of 686.5 million shares.
The MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 percent while Japan's Nikkei was down 0.3 percent.
STOCKS THAT MOVED
* Dr Reddy's Laboratories (REDY.NS) rose 0.15 percent after the drugmaker launched pain relief cream Supamovetm in India.
* DLF (DLF.NS) fell 3.1 percent. The property developer sold a unit to an affiliate of U.S. private equity firm Blackstone (BX.N) for $153 million, which brokerage Edelweiss said was in line with the company's guidance on asset monetisation and was already factored in the share price.
* PG Electroplast (PGEL.NS), Brooks Laboratories (BROO.NS), RDB Rasayans (RDBA.BO), Taksheel Solutions (TAKS.NS), Tijaria Polypipes (TIJA.NS), Onelife Capital Advisors (ONEL.NS) and Bharatiya Global Infomedia (BHRT.NS) fell between 4-18 percent after the market regulator banned them from accessing the securities market.
* Grasim Industries (GRAS.NS) rose 2.3 percent after its parent Aditya Birla Group announced an investment of $500 million over the next five years in Turkey.
* 3i Infotech (TIIN.NS) rose 0.4 percent after its board approved a corporate debt restructuring.