The headline indices fell to their lowest level in three weeks along with other Asian markets as China allowed the yuan to weaken further, stoking fears that the world's second-biggest economy could be even weaker than feared.
The 30-share index ended at 25,406.33, down 174.01 points, while broad-based 50-share index quoted 7,741.00, up 43.65 points at close.Market breadth turned fairly negative with 25 of the 30 Sensex components ending the day in red.
ITC was the worst performer on Sensex and lost 3 per cent on BSE.
China has guided the yuan lower since a surprise devaluation of the currency last summer, rattling traders who fear it could eventually set off a round of competitive devaluations which will put further pressure on other emerging economies.
"Sentiment is bearish because of data from China and US. The market is ripe for a fall," said Alex Mathews, head of research at Geojit BNP Paribas.
Auto stocks continued to be under pressure with mixed December sales numbers and a ban on sales of large diesel vehicles in the capital.
Tata Motors fell 2.39 per cent, Mahindra and Mahindra dropped 1.95 per cent and Maruti Suzuki declined 1.94 per cent.
Bucking the negative trend, sugar stocks such as Rana Sugars, Mawana Sugar, Oudh Sugar Mills and Empee Sugars & Chemicals gained up to 11 per cent on news reports that Uttar Pradesh Chief Minister Akhilesh Yadav may announce better price parity for sugarcane in a cabinet meeting on sugarcane pricing policy on January 7.
Being the first IPO to be listed in New Year, Narayana Hrudayalaya shares debuted smartly on bourses with a premium of over 16 per cent against its issue price of Rs 250.
The stock of healthcare services firm listed at Rs 291 on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) both and gained as much as Rs 344.20, up 37.68 per cent on BSE. The scrip ended at Rs 336.70, up 34.68 per cent against its issue price.
Among Asian markets, China's Shanghai Composite added 2.25 per cent higher after tumbling more than seven per cent in the first two days of the new year on fears about the economy.
Japan's Nikkei slipped 0.99 per cent, while Hong Kong's Hang Seng fell nearly 1 per cent.
US Stock futures fell more than one per cent in Asian trade on worrying news on the Chinese economy and North Korean security. Overnight, US markets ended slightly higher stabilizing after a weak start to the new year.
A lowdown on markets today
Sensex at 25,609.91, up 29.57 points
Nifty at 7,795.35, up 10.70 points.
Sensex at 25,552.24, down 28.10 points
Nifty at 7,776.15, down 8.50 points