The 50-share Nifty closed at 4739.60, down 130.50 points or 2.7 per cent. Intra-day, it touched a low of 4713.00 and a high of 4908.80.
The 30-share Sensex dipped below the 16,000-mark in the last few minutes of trade before ending at 16063.18, down 352.39 points, or 2.2 per cent. from Friday's close. It moved between 15991.21 and 16632.72 during the day.
The indices had started on a positive note, but soon slipped into the red amid weak cues from the European markets and talk that the Left parties may withdraw support to the United Progressive Alliance government in case it goes ahead with a fuel price hike.
The rumours gathered strength after Left party constituent Revolutionary Socialist Party decided to withdraw from the UPA-Left co-ordination committee and appealed to the remaining Left constituents to review their relations with the UPA government.
Volumes remained thin, indicating a lack of buying conviction. Oil retailers ended weak on news the government failed to reach a consensus on raising fuel prices. The cabinet is likely to discuss the issue on Wednesday.
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Inflation fears were also high as market participants brace themselves for higher fuel prices. The interest rate-sensitive stocks such as banks and real estate were hit as Reserve Bank of India is seen maintaining a tough monetary stance until inflation eases. Unitech and HDFC Bank ended down 6.5 per cent and 4 per cent respectively.
The BSE Realty and Power index closed at their one-year low on Monday and declined by more than three per cent each.
The Realty index was the largest loser (declined by four per cent). Most the front-line real estate and power stocks declined in the range of 3 per cent to 6 per cent.