The Sensex, which had gained nearly 696.42 points in the previous three sessions, dropped by 255.69 points, or 1.22 per cent, to 20,635.13, after touching a low of 20,579.94.
The 30-share index lost strength in the last 30 minutes weighed down by losses in ICICI Bank, RIL, Infosys, HDFC Bank and L&T. Bharti Airtel and Hindalco were the biggest losers.
CIL, Tata Power, Sesa Sterlite and Tata Steel gained.
Also, SX40 index, the flagship index of MCX-SX, closed 155.5 points lower at 12,245.9.
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While Fed chief Ben Bernanke yesterday reiterated the US central bank's commitment to easy policy, markets were seen nervous ahead of the release of minutes of Fed's October meeting and data relating to retail sales and pre-owned homes.
"...Heavy selling pressure in last hour of trade brought markets to negative territory as global indices were also in red ahead of US Fed meeting," said Nidhi Saraswat, Senior Research Analyst, Bonanza Portfolio Ltd.
Sectorally in India, the BSE Banking sector index, which was in lime-light for a few sessions, fell the most by losing 1.76 per cent, followed by Consumer Durable index by 1.63 per cent, Auto sector index by 1.23 per cent and Capital goods index by 1.17 per cent.
In the broader markets, sugar stocks, including Balrampur Chini and Bajaj Hindusthan, notched up 10-14 per cent gains on hopes of import duty hike.