Snapping the three-long gaining streak, the S&P BSE Sensex wiped off all early gains to end the day 362 points on Tuesday, while broader CNX Nifty slipped below its key 7,050-mark after testing 7,200.
The benchmark indices sank as investors booked profits in sectors such as banks and capital goods, while sentiment was also hit after data showed exports shrank in January for a 14th straight month.
The 30-share index ended the day at 23,191, down 362.15 points, while broad-based 50-share index quoted 7,048, down 114.70 points at close.
Market breadth turned fairly negative with 26 of the 30 Sensex components ending the day in red.
The falls contrasted with gains in most of the region, which benefitted from a combination of stabilising Chinese markets, rebounding oil prices and solid US consumption data. The NSE Nifty surged 2.6 per cent on Monday, its biggest single-day percentage gain in more than a year, as state-run banks recovered from recent losses, but analysts warn overall sentiment remains weak due to poor corporate earnings and caution ahead of the 2016/17 budget due on February 29.
"It has largely to do with good amount of short-covering that had happened yesterday and that had propelled the rally in the market," said Deven Choksey, managing director of KR Choksey Securities.
"I doubt there was any genuine aggressive buying yesterday."
Meanwhile, data late on Monday showed domestic exports fell 13.6 per cent last month from a year ago on continued weak demand from Europe.
SBI was the worst performing stock on both the headline indices and lost nearly 7 per cent.
Software services exporters were among the day's losers, with Infosys down 0.95 per cent.
Bank of Baroda fell as much as 5.6 per cent after the state-run lender rallied 22.55 per cent on Monday following positive management comments.
Liquor baron Vijay Mallya's UB Holdings fell as much as 13.4 per cent, after Punjab National Bank declared the company as a "wilful defaulter" on Tuesday.
Jindal Steel and Power dropped as much as 5.9 per cent after local ratings agency CRISIL downgraded JNSP credit to A4+ from A3+.
Among Asian markets, China's Shanghai Composite settled the day 3.29 per cent higher, Hong Kong's Hang Seng index added 1.08 per cent, while Japan's Nikkei ended flat.
(With inputs from Reuters)