The BSE benchmark index opened 203 points down at 18,292.22 in volatile trading. Brokers said sentiment was hit with Trinamool Congress announcing that it will withdraw ministers from the UPA government over the issue of FDI in retail, diesel price hike and cap on supply of LPG cylinders.
Global cues also soured domestic market activity after reports that China's manufacturing industry will contract for 11th month. Asian markets closed 1-2 per cent down while Europe was also trading lower in afternoon deals.
The Sensex, however, recouped some losses on the back of rise in IT stocks TCS and Infosys, and closed at 18,349.25, down 146.76 points or 0.79 per cent -- the second straight day of losses. Today's fall is the worst single-day fall since September 3 when it fell by 157.24 points.
"After weak Chinese data, investors again opted to book profits in the one of the strongest rallies witnessed recently. Political derangement also soured sentiments," said Nidhi Sarswat, Senior Research Analyst, Bonanza Portfolio.
Twenty scrips led by PSUs including Bhel, Gail and Coal India of the 30-share Sensex ended among losers. Reliance Industries, ICICI Bank and HDFC also pulled down the index.
Likewise, the 50-share NSE index dropped by 45.80 poins to 5,554.25, after touching a day's low of 5,534.90.
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The metal sector index suffered the most by losing 2.28 per cent amid a weak trend in base metals at the London Metal Exchange. It was followed by capital goods sector that lost 1.94 per cent and the power sector that shed 1.63 per cent.
The government had unveiled last week big-bang reforms by opting to hike diesel prices after 14 months and allowing FDI in aviation and retail sectors, among others.