The Sensex, which had gained 176 points in last three sessions, fell by 120.41 points, or 0.70 per cent to 17,158.44 led by shares of banks, capital goods and realty.
Brokers said investors became cautious following reports that senior ministers Sharad Pawar and Praful Patel belonging to NCP, a key ally of the UPA coalition, resigned amid investors' hopes of speedier reforms after Presidential polls.
"We reiterate reforms are a prerequisite for markets to move up," said Dipen Shah, PCG Research head, Kotak Securities.
Traders said the sentiment was further hit after the Reserve Bank of India placed on its website a report of the Working Group to review the existing prudential guidelines on restructuring of advances by banks / financial institutions.
Bank stocks including ICICI Bank, HDFC Bank, HDFC and SBI ended lower as investors expected tight regulations on loan restructuring to hit earnings.
In the 30-share Sensex, 24 stocks led by Dr Reddy's, BHEL, Sterlite and Hero MotoCorp fell while six scrips including Bajaj Auto and TCS ended with gains. Bucking the weak trend, Maruti closed 0.3 per cent higher after its steepest fall in almost two years following recent violence at Manesar plant.
However, Reliance Industries fell by nearly 0.9 per cent ahead of expectations of weak quarterly earnings later today while tech major Infosys slid by 1.13 per cent.
Dealers said the negative trend persisted as European stocks dropped after China pledged to keep property curbs.
The 50-share National Stock Exchange index Nifty fell by 37.60 poins or 0.72 per cent to 5,205.10.
