Forex dealers said a firm dollar overseas also weighed on the rupee sentiment. However, sustained capital inflows restricted the local unit's fall to some extent.
The rupee moved in a range of 54.99 and 55.30 against the dollar at the Interbank Foreign Exchange (Forex) market before settling at 55.06, a loss of 21 paise, or 0.38 per cent, from its previous close.
Meanwhile, the BSE benchmark Sensex fell by 211.92 points to 19,242. According to Sebi data, FIIs infused USD 107.62 million yesterday in the local equities.
"The weakness in rupee was mainly on account of recovery in the dollar index, euro falling below USD 1.3200 levels and uncertainties over US fiscal cliff. All the Asian currencies were trading on a negative note against the US dollar," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
"There is a risk aversion taking place in the market, as can be seen from weakness in riskier assets globally. Going ahead, fiscal cliff concerns will continue to keep rupee under pressure," he added.
The dollar index was up by 0.19 per cent against a basket of six major global currencies after reports said that US Republican leaders cancelled a planned vote that would permit higher taxes amid stalled budget talks.
In the United States, the fiscal cliff is a term used to refer to the economic effects that could result from tax increases, spending cuts and a corresponding reduction in the US budget deficit beginning in 2013 if existing laws are not changed by the end of 2012. (MORE)