The 30-share prime index of the Bombay Stock Exchange (BSE), the Sensex, dropped 3.42 percent, Friday, to its lowest close in nearly six months on fears of economic slowdown in the US and rising inflation back home.

Sensex heavyweights, top listed firm Reliance Industries Ltd (RIL), India's No.2 bank, ICICI Bank and engineering and construction major, Larsen & Toubro (L&T), led the Sensex plunge as it dropped 566.56 points to close at 15,975.52, taking its losses for 2008 to 21.25 percent, with 27 components ending in the red. The three firms together account for nearly one-third of the main index.

It was the main index's lowest close since Sept. 18, the day the US Federal Reserve started cutting US interest rates to shore up the world's largest economy against recession.

Earlier, on March 3, the index had plunged by 900 points.

For the third trading session in a row, ICICI Bank's stock ended in the red, falling 7.04 percent to Rs.892.75, following the news that its overseas exposure to subprime crisis has resulted in market-to-market (MTM) operational losses of $264.34 million.

While bigger rival State Bank of India (SBI) fell 0.7 percent, India's No.3 bank, HDFC Bank fell 3.75 percent.

Overall situation is bad as far as banking stocks go. There is still a lot of obscurity as far as credit fears are concerned. We are still not sure of the exposure of Indian banks to the US mortgage market, said Karvy Stock Broking banking analyst Rakesh Kumar.

The budgetary decision to waive off farmer loans worth Rs.60,000 crore ($15 billion) has also dampened the mood for the banking sector. There is a fear among investors that farmers, who have been repaying loans all the while, would now stop paying back, said Vaibhav Agrawal, banking analyst of Angel Broking.

Bankex, the sectoral index on the BSE, has dropped 19 percent over the past one month and 16 percent over the past five trading sessions alone.

Anil Dhirubhai Ambani Group firm Reliance Energy Ltd (REL) fell nearly 13 percent to Rs.1,270, its lowest close in nearly six months, despite the announcement of an offer to buy back $500 million of shares at up to Rs.1,600.

Shares of Bajaj Auto fell 11.23 percent to Rs.1,889.15 on the news that it will be removed from the broader 50-share S&P CNX Nifty of the National Stock Exchange (NSE) from March 14.

Other top losers were Hindalco (down 5.79 percent), NTPC (down 5.06 percent), HDFC (down 4.57 percent), Mahindra & Mahindra (down 4.52 percent), Tata Motors (down 4.40 percent), Ranbaxy (down 4.11 percent), Wipro (down 3.64 percent), DLF (3.47 percent), ONGC (down 3.31 percent), Tata Steel (down 3.24 percent), Tata Consultancy Services (TCS) (down 3.20 percent), Infosys Technologies (down 2.85 percent), Grasim Industries (down 2.76 percent), Cipla (down 2.68 percent) and BHEL (down 2.67 percent).

The only gainers of the day were Reliance Communications (up 2.99 percent), Hindustan Unilever Ltd (HUL) (up 0.49 percent) and Bharti Airtel (up 0.15 percent).

The BSE realty index was the worst affected and the Bankex too was down 4.92 percent.

Power and metal sectors were also down.

All the sectoral indices closed in the negative zone. The worst performers were the BSE Realty index (down by 6.64 percent at 7,782.38), the BSE Power index (down by 5.57 percent at 3,155.16), the BSE Bankex (down by 4.92 percent at 8,477.46 points), the BSE Consumer Goods index (down by 4.52 percent at 14,025.12 points) and the BSE Auto index (down by 4.44 percent at 4,634.70).

The BSE Metal index, the BSE Consumer Durables index, the BSE PSU index and the BSE IT index were down over 3 percent each.

The BSE Oil & Gas Index was down 2.98 percent; the BSE Healthcare index was down 2.10 percent; the BSE TECk was down 1.90 percent; and BSE FMCG index was down 1.09 percent.

The BSE Midcap and the Smallcap indices plunged by 309.79 points or 4.35 percent and 400.61 points or 4.55 percent to 6,804.39 and 8,409.18 respectively.

The BSE market breadth was negative as 2,384 shares declined, 295 shares advanced and 31 shares remained unchanged.

The NSE Nifty index fell 3.04 percent to 4,771.60, its lowest close since Sept. 20, and lost 8.7 percent on the week.

Currently we are in the middle of all negative news, which is making the downside sharp. Negative cues are coming from the global markets and here nuclear deal is again in the limelight, said Dipak Acharya, a fund manager with BoB Mutual Fund.

India's communists, formidable allies of the ruling government, have been opposing a nuclear deal with the US and have threatened to withdraw support if the government moves ahead with the pact.

And no one is expecting an immediate rate cut, which was earlier there. So now we have to see how they balance between inflation and interest rates, Acharya said.

For the first time in 10 months, inflation breached the 5 percent-mark to touch 5.02 percent during the week ended Feb. 23 and spoiled the chances of the Reserve Bank of India (RBI) indicating any rate cuts in its April policy meet.

Crude oil touched a high of $105.40 on Thursday.

Global economies are heading for a recession and that is impacting the Indian markets, said Rajnish Rangari, country head (investment banking), Karvy Investor Services Ltd.

There was some redemption pressure on US hedge funds and simultaneously there is lack of buying interest in the market which is pushing the markets downwards, added Anita Gandhi of Arihant Capital Markets Ltd.

Markets were in the debris, covered with negative news from all around, said Ajit Sanghvi, director, MSS Securities.

It is difficult to judge the Indian markets now with all the Asian markets following the US markets, said Jignesh Desai, head (institutional sales), SBICAP Securities.

The market is reacting to any bad news on the global front. Purely on the basis of fundamentals, Indian markets are in a buying zone. A lot of large caps are now moving towards value. Markets have factored in a slowdown in corporate earnings and hence that is not likely to affect the market sentiment in a significant way, said Amar Ambani, vice president (research), India Infoline.

Foreign funds have been net sellers of $3.4 billion of shares so far this year, after buying a record $17.4 billion in 2007.

Elsewhere in the region, Karachi's 100-Share index fell 0.44 percent to 15,078.19, while Colombo's All-Share index edged up 0.06 percent to 2,567.79, its highest close since Nov. 26.

The US subprime woes have heavily influenced the Asian markets whose indices fell in the range of 1.26 percent to 3.6 percent on Friday. Japan's Nikkei closed down 3.27 percent, Hong Kong's Hang Seng closed down 3.6 percent and Taiwan's Composite Weighted Index closed down 1.47 percent.

Key US indices, the Dow Jones Industrial Average (down 1.75 percent) and S&P 500 index (down 2.2 percent) had a dismal trading session on Thursday following news that Thornburg Mortgage Inc, a mortgage lender, was in default after failing to meet creditor demands for more upfront cash.