The S&P' downgrade threat came a day after the IMF slashed the country's growth forecasts for 2012 to 4.9 per cent, dampening the sentiment further.
After resuming over 100 points lower, the BSE benchmark index failed to stage a recovery amid fresh concerns over the sluggish global economic growth and Eurozone debt crisis.
The rupee also wilted under pressure and fell below the 53-mark against the US dollar in early trade.
With 27 stocks of the 30-share Sensex ending lower, the Sensex closed near day's lows at 18,631.10, down 162.26 points or 0.86 per cent. Likewise, NSE Nifty fell below 5,700 level by losing 52.45 points, or 0.92 per cent, to 5,652.15.
S&P analysts Takahira Ogawa and Elena Okorochenko today said that its negative outlook on India signals at least a one-in-three likelihood of a downgrade of the sovereign rating on India within the next 24 months.
Traders said investors hurriedly cut positions as S&P's warning of a downgrade comes a day after IMF cited low business confidence and "sluggish structural reforms" for lowering its growth forecast for India.
SBI, which dropped 2.32 per cent, was the biggest loser among Sensex. It was followed by Tata Power, Hindalco, BHEL, NTPC and M&M. Wipro fell by 1.72 per cent while Infosys fell 1.3 per cent ahead of September quarter results on Friday.
Private lenders HDFC Bank and ICICI Bank dropped around one per cent each. However, ITC, RIL and Hero MotoCorp bucked the negative trend.
Barring FMCG index, the other 12 sectoral benchmarks today fell. Realty shares were hit hard after DLF tanked 5 per cent.
Overall, just 978 stocks today advanced while 1,929 scrips declined as market breadth was significantly negative.
Dealers said a weakening trend in the Asian region and lower opening in Europe also hit the domestic market trading.
