The BSE benchmark index, which had lost 72 points in the previous session, opened marginally higher but shares in capital goods, PSU, banks, FMCG and IT faced selling pressure throughout the session. The Sensex fell by 206.23 points, or 1.22 per cent to 16,639.82, a level last seen on June 7.
Led by Tata Motors which fell close to 4 per cent, 22 stocks including Tata Power, Wipro, Sterlite and SBI clsoed with losses in the 30-share index.
Shares of ITC, closed 2 per cent down, after its first quarter revenue at Rs 6,652 crore could not beat expectations.
On similar lines, the 50-share National Stock Exchange index Nifty lost 66.60 points, or 1.30 per cent to 5,043 with most of the interest-related sectors ending lower.
Fears of rising inflation, driven by possible hikes in fuel and commodity prices have raised fresh concerns that the Reserve Bank of India might keep rates unchanged on July 31 even as rains continue to be poor, they added.
"Deficient monsoon witnessed in the country is continuously putting pressure on the upside," said Nidhi Sarswat, Senior Research Analyst, Bonanza Portfolio.
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The BSE Realty sector suffered the most damage today by losing 3.07 per cent with DLF falling 2.85 per cent while Parsvnath Developers tanked 20 per cent. The capital goods sector fell over 2 per cent with Bhel and L&T dropping close to 2 per cent each.
Experts also said June quarter earnings have been tepid and that is another reason for FIIs selling stocks for the last 2-3 days. IT majors Infosys, TCS and Wipro fell on concerns the deepening Eurozone debt crisis might hurt IT services demand.