The 30-share Sensex, which had lost 17 points in the previous session, fell by a further by 150.72 points, or 0.87 per cent to close at 17,151.19.
On similar lines, the broad-based National Stock Exchange index Nifty fell 50.75 poins, or 0.97 per cent to settle at 5,188.40.
Brokers said the foreign funds remained net sellers as the rupee falling to its four-month lows, raised concerns of the government's ability to bridge the gap in widening deficits.
They said the selling pressure further gathered momentum following weak earnings by Hero MotoCorp and FMCG Major Marico. The negative trend in overseas markets fuelled by investor sentiment after weak economic data released by US and Eurozone also played a role.
FIIs were also reluctant to create positions following the government proposals to introduce the General Anti Avoidance Rule (GAAR) to curb evasion of taxes, brokers added.
The BSE Auto sectoral index suffered the most by losing 2.43 per cent to 10,209.04, followed by BSE Metal index that dropped by 1.75 per cent to 10,833.90. The BSE Bankex fell by 1.74 per cent to 11,653.70.
Major index losers were Hero MotoCorp, Maruti Suzuki, Tata Motors, Bajaj Auto, Mahindra and Mahindra, ICICI Bank, Larsen and Toubro, Jindal Steel, State Bank of India, Tata Steel, Coal India, DLF, Gail India and ONGC.
However, bucking the overall trend, the BSE IT sector led by Infosys and Tata Consultancy Services (TCS) gained 0.71 per cent as investors expected the weak rupee to aid margins. PTI RS SUN KPS DP
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