Heavy European sell-offs coupled with profit bookings and anxiety over the upcoming derivatives expiry eroded investors' confidence which plunged a barometer index of the Indian equities by over 540 points or 2.07 percent on Tuesday.
Other negative global cues, such as worries over Chinese economy, dwindling rupee value and sobering prospects of a rate cut by the apex bank also spooked investors.
The barometer 30-scrip sensitive index (Sensex) of the S&P Bombay Stock Exchange (BSE) had previously closed flat. It ended Monday's trade down 25.93 points or 0.10 percent at 26,192.98 points.
On Tuesday, similar subdued sentiments were observed at the wider 50-scrip Nifty of the National Stock Exchange (NSE). It declined by 165.10 points or 2.07 percent at 7,812 points.
The S&P BSE Sensex, which opened at 26,274.37 points, closed at 25,651.84 points, down 541.14 points or 2.07 percent from the previous day's close at 26,192.98 points.
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The Sensex touched a high of 26,339.10 points and a low of 25,571.34 points in the intra-day trade.
Market observers' cited weak European cues, especially after the re-elections in Greece, dwindling rupee value and the upcoming derivatives expiry, as the main reasons for the markets' fall.
"In absence of any major domestic trigger, the markets looked towards international cues. The weak cues coming in from European markets led the downfall," Anand James, co-head, technical research desk with Geojit BNP Paribas Financial Services, told IANS.
Major European markets slumped between 2-3 percent, as metal companies witnessed sharp sell-offs following a fall in copper prices which was sparked by concerns over a global surplus of the industrial metal.
"The Indian market which had opened marginally in the positive in the morning; however corrected significantly, tracking the sell-off in the European markets," Vaibhav Agrawal, vice president, research, Angel Broking, told IANS..
Caution regarding Eurozone was also evident after Greece's election gave a clear mandate to ex-prime minister Alexis Tsipras.
James added that: "Investors were reluctant to chase higher prices, given the upcoming F&O (futures and options) expiry. There was also anxiety over whether or not the Reserve Bank of India (RBI) will go in for a rate cut."
The RBI will decide on whether or not to cut interest rates in its upcoming monetary policy review slated for September 29.
Gaurav Jain, director with Hem Securities, explained that the markets closed deep in the red due to due to profit booking and unwinding of positions ahead of September derivative contracts expiry.
Furthermore, the rupee depreciated by 15 paise in the day's trade. It closed at 65.88 to a US dollar, up 15 paise from its previous close of 65.73 to a greenback.
Sector-wise, banking, capital goods, metal, automobile, oil and gas, healthcare, power and fast moving consumer goods (FMCG) stocks came under intense selling pressure.
All the 12 sector-based indices of the S&P BSE closed in the red.
The S&P BSE banking index plunged by 611.60 points, capital goods index plummeted by 485.23 points, metal index receded by 308.98 points, automobile index declined by 304.84 points, and oil and gas index fell by 111.21 points.
The S&P BSE healthcare index tumbled by 80.25 points, FMCG index decreased by 66.32 points and power index dwindled by 57.92 points.
Major Sensex gainers during Tuesday's trade were: Wipro, up 0.40 percent at Rs.594.65; Mahindra and Mahindra, up 0.20 percent at Rs.1,186.80; Sun Pharma, up 0.13 percent at Rs.900.95 and Infosys, up 0.08 percent at Rs.1,105.50.
The major Sensex losers were: Vedanta, down 6.29 percent at Rs.92.35; Hindalco Industries, down 6.22 percent at Rs.73.15; Coal India, down 5.40 percent at Rs.323.85; Tata Motors, down 4.81 percent at Rs.315.65; and NTPC, down 4.58 percent at Rs.120.80.