Sentiment was hit by monsoon making marginal progress and caution ahead of macro data -- IIP for April and CPI for May.
Brokers said participants preferred to book profits in stocks that rebounded in previous session.
Yesterday, RBI had said that Current Account Deficit fell sharply to its lowest level in a year at USD 1.3 billion or 0.2 per cent of GDP in the fourth quarter of 2014-15.
However on emergence of profit-booking it slumped to 26,348.93 before closing 469.52 points or 1.75 per cent down at 26,370.98, its weakest closing since October 17, last year.
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Yesterday, the index had jumped 359.25 points or 1.36 per cent on value-buying as MSCI deferred inclusion of China A shares in its index keeping India weightage intact.
The broader NSE Nifty slipped below the important 8,000 and finally settled 159.10 points or 1.96 per cent lower at 7,965.35. Intra-day, it moved between 8,163.05 and 7,958.25.
Shares of Tata Steel fell 2.34 per cent, to Rs 298.80 after UK unions notified the company of an industrial action on June 22 over the firm's proposal to revise the British Steel Pension Scheme (BSPS).
Of 30-Sensex stocks, 29 stocks ended lower, while Vedanta finished in positive zone.
Tracking overall trend, broader market also depicted a subdued trend with the mid-cap and small-cap indices ending 1.78 and 1.55 per cent down, respectively.
Asian markets ended higher, while European indices were trading in positive zone in their morning trades.