The 30-share Sensex after moving in a tight range for the major part of the session ended 62.52 points, or 0.23 per cent, lower at 26,567.99.
The 50-share NSE Nifty moved down by 19.25 points, or 0.24 per cent, to finish at 7,945.55.
"Profit-booking and cautious approach by participants ahead of a long week-end and slowdown in September manufacturing weakened market sentiments", said Manoj Choraria, a Delhi-based broker.
According to an HSBC survey, the headline HSBC India Purchasing Managers' Index (PMI) -- a composite gauge designed to give a single-figure snapshot of manufacturing business conditions -- dropped from 52.4 in August to 51.0 in September, the slowest pace of growth since December, 2013.
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Brokers said in view of long holidays ahead investors were seen refraining from enlarging their positions, they even reduced positions.
Meanwhile, the provisional data released by the stock exchanges showed that foreign portfolio investors (FPIs) sold shares worth a net Rs 485.93 crore yesterday.
RIL fell by 1.96 per cent, ONGC by 1.58 per cent and GAIL 2.27 per cent, dragging down the benchmark Sensex.
Bucking the trend, IT stocks led by Infosys, Tata Consultancy Services and Wipro rose, after rupee fell to seven-month low against the dollar.
Nearly 60 per cent revenues of IT companies comes in dollar.
Stocks of Hero MotoCorp, the country's largest two-wheeler maker, climbed 1.24 per cent after company reported over 30 per cent jump in its sales in September to six lakh units, riding on strong festive season demand.
Sectorwise, the Oil & Gas sector index suffered the most by losing 1.55 per cent, followed by FMCG index by 1.26 per cent, Consumer Durables index 0.85 per cent, Banking index closed 0.44 per cent lower.