The index fell 2.01 per cent, or 343.58 points, to close at 16,737.07 points. The broad-based National Stock Exchange (NSE) Nifty closed at 4982.6 points, down 99.1 points or 1.95 per cent.
The Sensex has fallen 863.05 points, or nearly 5 per cent, this week. Most Asian indices in China, Hong Kong, Japan, Singapore, South Korea and Taiwan were down by 0.36 per cent to 2.06 per cent.
The slide was led by market biggie Reliance Industries (down 5.19 per cent to Rs 2527.65 a share) and Reliance Petroleum (down 8.03 per cent to Rs 181.05 a share).
Other oil company shares such as Essar Oil (down 9.45 per cent to Rs 257.15 a share) and Cairn India (down 1.99 per cent to Rs Rs 273.95 a share) also slipped after market sentiment turned against these stocks. Earlier, Finance Minister P Chidambaram said the government would take more steps to curb inflation, if needed.
The BSE Oil and Gas Index closed at 11,080.88 points, down 4.71 per cent or 547.57 points. Banking and realty stocks plunged after inflation figures indicated that interest rates will not go down.
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"The market had discounted high inflation in the last couple of weeks. Since crude oil has now crossed $120 a barrel, there is a sense that there is no respite. Moreover, the current market is light since positions in the market are not leveraged. Consequently, any small buying or selling is enough to push the market in a particular direction," said Amar Ambani, vice-president, research, India Infoline.
Crude oil for June 2008 delivery hit a record high of $125.12 a barrel in electronic trading on the New York Mercantile Exchange on Friday. It is set for the biggest weekly gain since March last year, as concern that violence in Nigeria will cut supply spurred speculative buying.
Foreign institutional investors (FIIs) have sold to the extent of Rs 619.34 crore while domestic institutional investors (DIIs) have bought around Rs 180.16 crore, according to provisional figures on the BSE website.