Participants also preferred to cut down on their positions ahead of the US Federal Reserve meet next week, brokers said.
Moreover, weak global cues with Tokyo stocks falling after fresh data aggravated worries about Japan's economy and a lower opening in European markets, also triggering selling.
The BSE Sensex crashed below the crucial 27,000-mark to hit a low of 26,692.35 before settling 257.20 points or 0.95 per cent lower at 26,763.46. The gauge had risen by 243.21 points in the past two days.
"Markets opened the day with losses over yesterday's closing and remained in negative terrain throughout the day as investors locked-in profits after recent gains," said Manoj Choraria, a Delhi-based NSE stock broker.
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IT, teck, FMCG, capital goods, auto, healthcare and banking were the hit hardest.
The broader markets too felt the heat with the BSE mid-cap index falling 0.47 per cent while small-cap edged up by 0.04 per cent.
Other major losers were HUL (2.28 pc), Dr Reddy's (1.95 pc), Asian Paints (1.94 pc), HDFC (1.74 pc), Bajaj Auto (1.39 pc), TCS (1.29 pc), L&T (1.21 pc), ICICI Bank (1.18 pc) and Adani Ports (0.81 pc).
However, Coal India rose by 2.13 per cent followed by ONGC 1.99 per cent, RIL (1.81 pc), NTPC (1.66 pc), Cipla (1.51 pc) and Axis Bank (0.57 pc).
Meanwhile, foreign investors bought shares worth a net Rs 529.16 crore yesterday, as per provisional data.
European shares too were trading lower with indices in France and the UK falling by 0.43 per cent to 0.87 per cent.