The market was also impacted by global stocks that nosedived amid a worsening political scenario in Greece.
The 30-share Sensex, which made a brief recovery yesterday after five days of straight losses, fell to 15,974.60 levels in intra-day trade as foreign funds remained net sellers.
Similarly, the broad-based NSE Nifty lost 84.55 points, or 1.71 per cent to 4,858.25, after touching a low of 4,837.05.
Brokers said selling pressure gathered momentum as the weakening rupee fell to an all-time low of 54.46 against the US dollar raising concerns among foreign investors that the economy is slowing down amid a widening budget deficit.
European shares were down in initial trading with UK's FTSE and Germany's DAX trading over 1 per cent.
Asian stocks closed with over 3 per cent losses. Japan's Nikkei dropped 1.14 per cent, Honk Kong's Hang Seng shed 3.1 per cent and Korea's Kospi lost 3.1 per cent.
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Market participants said sentiments were further jolted by the fall in global markets after the Euro was pegged at a four-month low on news that Greece will go to polls triggering fears it may exit the Eurozone.
Among the Sensex, 28 closed lower while Bajaj Auto and Sterlite Industries managed to end with gains.
All sectoral indices remained in red led by metal, auto and bank counters on across-the-board selling.
The major contributors to Sensex's fall were Tata Motors, Reliance Industries, Infosys, Bharti Airtel, BHEL, Cipla, Coal India, HDFC Bank and Hero MotoCorp. ICICI Bank, Jindal Steel, Larsen and Toubro, Maruti Suzuki and Tata Steel were also hit.