The Sensex dropped by 211.92 points, or 1.09 per cent, to 19,242 led by realty, metal and healthcare sectors.
The broad-based National Stock Exchange index Nifty dropped by 68.70 points, or 1.16 per cent, to 5,847.70.
Brokers said profit-booking by major market players ahead of the ending of calender year amid steep fall in overseas markets as hopes of solution to the US budget deficit issue mainly pulled down the trading sentiment.
"Global cues also were not supportive as fiscal cliff issues continue to overshadow any other economic news," Amar Ambani, Head of Research, IIFL, said.
Bharti Airtel shares lost 3 per cent on reports of CBI filing charge sheet in connection with alleged irregularities in spectrum allocation during the NDA regime involving three telecom companies.
Asian and European stocks fell from a 19-month high after reports said American House Republicans cancelled a vote on higher taxes for top earners, fuelling concern budget talks will fail.
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In 30-share BSE Sensex components, barring ITC and Tata Consultancy Services, all the stocks closed with losses.
The realty sector index suffered the most by losing 3.51 per cent to 2,048.55 followed by metal index by 1.80 per cent to 11,039.17. The capital goods index lost 1.66 per cent to 10,735.11 and banking index by 1.34 per cent to 14,151.18.