By Abhishek Vishnoi
MUMBAI (Reuters) - The BSE Sensex fell more than 1 percent on Thursday, while a volatility index surged, as the prospect of an end to the U.S. stimulus programme and a weak China manufacturing survey sparked concerns that foreign investors will end their recent buying spree.
Federal Reserve Chairman Bernanke's comments suggesting bond purchases could be scaled back if U.S. economy improves sparked the falls, with Asian shares also hit badly, while State Bank of India slumped after disappointing quarterly earnings.
A potential early wind-down of the U.S. stimulus programme could hit Indian stocks badly, analysts have warned, as foreign institutional investors have been net buyers for 25 consecutive sessions, helping spark a rally since mid-April.
Still, analysts said prospects of the Reserve Bank of India cutting interest rates again in June after easing three times this year could help support shares.
"Worries about outflows may persist for the next few days but people would buy into declines," said G. Chokkalingam, chief investment officer, Centrum Wealth Management.
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The Nifty was down 1.9 percent as of 1:56 p.m., trading below the psychologically important level of 6,000 points after earlier hitting its lowest since May 14.
The BSE Sensex was down 1.72 percent, after touching its lowest in more than a week earlier in the session.
The NSE's volatility index, considered by some investors as a fear guage, jumped as much as 8 percent to its highest level in eight months on worries about outflows.
Blue chips led the index falls, with ICICI Bank Ltd falling 3.2 percent and Reliance Industries Ltd losing 3 percent.
State Bank of India fell 6.9 percent after posting its first quarterly net profit fall in two years, missing market estimates hurt by lower interest income and higher provisions for loan losses.
Larsen & Toubro Ltd fell 5.4 percent, adding to Wednesday's nearly 6 percent decline, on lingering disappointment over its January-March profit and outlook out on Wednesday.
Ranbaxy Laboratories Ltd slumped 8.7 percent after majority shareholder Daiichi Sankyo Co said it believed former shareholders of the Indian company hid information regarding U.S. regulatory probes.
However, among stocks that gained, Oracle Financial Services Software Ltd rose 9 percent after a higher-than-expected response to its share sale squeezed out short positions in the futures market, dealers said.
(Editing by Rafael Nam and Gopakumar Warrier)