The Bombay Stock Exchange benchmark Sensex fell below the 20,000-mark on Tuesday, down about 445 points - biggest decline in six months - on frenzied profit-booking and weak trend in Asian markets.
The National Stock Exchange's broad-based Nifty also closed below the magic 6,000-mark.
The fall was fuelled by speculations that central banks worldwide might raise borrowing costs to cool down inflation, constricting the availability of cash for equity investment.
While the Bombay Stock Exchange benchmark index Sensex fell 444.55 points to 19,865.14, Nifty, fell 132.90 points to 5,988.70.
After a weak opening, Sensex fell to a month's low, as selling pressure gathered momentum influenced by melting Asian stocks, led by China, Hong Kong and Japan.
The regional index for Asian markets fell for the third straight session on Tuesday on speculation that governments will take further steps to cool down inflation, coupled with a decline in raw material prices.
China's stocks fell, driving the benchmark index to the lowest in a month, on speculation the government might intensify measures to curb accelerating inflation, including higher interest rates and price controls.
The MSCI Asian Index fell to its lowest level since November 3 in Tokyo, as the Shanghai Composite Index dropped 3.98 per cent.
Of the 30-BSE index, barring Bharti Airtel, all 29 stocks fell sharply, while all the sectoral indices closed with losses.
The realty sector index suffered the most - losing 3.55 per cent to 3,325.98 - on fears of increase in interest rates, which might impact new constructions and home sales.
The metal sector index was second-worst performer and shed 3.11 per cent to 16,577.31, after copper, aluminium, zinc and lead fell sharply in London, amid fears that any measure taken by China, the leading consumer of the base-metals, would reduce demand for the commodity.
The capital goods sector index fell 2.78 per cent to 15,602.93, consumer durable index 2.58 per cent to 6,715.22 and auto index 2.22 per cent to 9,983.56.
As the selling pressure spread over a wide-front, smallcap index fell 2.92 per cent to 10,566.95 and midcap index 2.15 per cent to 8,266.42. Investors refrained from creating fresh positions in view of the public holiday on Wednesday.