The 30-share index ended the day at 28,353, down 443.71 points, while broad-based 50-share index quoted 8,715, down 151.10 points at close.Also, weighing on sentiment was reports that the Bank of Japan was considering ways to steepen the Japanese yield curve, along with worries that central banks more generally were running short of fresh stimulus options.
Reflecting the caution, Asian shares suffered their sharpest setback since June with MSCI's broadest index of Asia-Pacific shares outside Japan falling 2.2 percent, pulling away from a 13-month peak hit last week.
Some Fed officials have been trying to convince markets that the September meeting would be "live" for a hike, even though futures only imply a one-in-four chance of a move.
"The main trigger for today's fall comes from the Fed comments made on Friday on the increased probability of a rate hike. Markets also remain heated from last week's reports of a nuclear test in North Korea," said Neeraj Dewan, director at Quantum Securities, adding that he expected the market volatility to continue until the Fed decision.
Both the indexes posted their worst intraday fall since Britain voted on June 24 to leave the European Union.
Stock market will be closed on September 13 for a public holiday.
Banking shares took the maximum hit with the Nifty bank index among the leading losers, posting its biggest intraday percentage fall since June 24. The sector had gained about 5.5 per cent in the last two weeks.
IT stocks such as Infosys, TCS, Wipro, HCL Tech and Tech Mahindra added up to 2 per cent intraday on the BSE. The BSE IT index gained 0.87 per cent.
(With inputs from Reuters)