The Sensex and Nifty ended lower in volatile trade on entering the February derivatives expiry week as effects of the PNB scam on other lenders unfolded. Broad-based selling across the market also contributed to losses. While the Sensex closed 236.10 points (0.69%) lower at 33,774 level, the Nifty was down 167 points (1.58 percent) to 10,378 level.
The indexes fell for a second straight session after the Sensex closed 286 points lower to 34,010, and Nifty fell 93 points to close at 10,452 points on Friday.
The PNB stock fell up to 9.6% to its lowest since February 14 after Rs 11,400-crore fraud was reported by Punjab National Bank.
"The domestic market continued to fall despite positive global cues led by weakness in shares of public-sector banks as news flow on an alleged fraud case at a major public-sector bank roiled investor sentiment. During the day Nifty PSU Bank Index was down by nearly 4% and hit a 52-week low of 2,982 points. The under-performance of small and mid-cap stocks and a spike in crude oil prices that led to fears of a rise in the fiscal deficit also did nothing to boost sentiment," said Karthikraj Lakshmanan, Senior Fund Manager - Equities, BNP Paribas Mutual Fund.
UCO Bank slumped as much as 12.3 percent to its lowest since April 2009 after the state-run lender said it had $411.82 million in exposure to fraudulent transactions carried out at PNB.
City Union Bank declined as much as 5.3 percent after its chief executive said "cyber criminals" hacked the bank's systems and transferred nearly $2 million via unauthorised remittances to lenders overseas.
Worries about the impact from guarantees to PNB loans hit other lenders.
"It could continue to impact for some more time. The issue of its impact on the entire PSU banking system will keep markets edgy," said Siddhartha Khemka, head of retail research, Motilal Oswal Securities.
Bank stocks led to negative sentiments with the bankex falling 162 points to 28,233 level.
All 19 BSE sectoral indices closed in the red signifying weakness and volatility in the market.
BSE Capital Goods (1.56%), BSE auto (1.11%) and BSE metal (1.60%) were the top losers among sectoral indices.
"Markets opened higher but quickly gave up gains. Upward bounces have not sustained. The level of 10,380 which had provided support earlier in the day has also been breached. Banks (especially PSU) continue to be under pressure as fallout of the PNB developments and awaiting some firm signals from the RBI/Finance ministry. A breach of 10,276 on the Nifty can bring a fresh round of weakness," said Deepak Jasani, Head, retail research at HDFC Securities.
The Sensex, which fell 456 points intra day to 33,554 level around 1 pm recovered amid short covering which capped losses for the market.
On the Sensex, Tata Steel was the top loser falling 5.82% to 648.25 level. Its Rs 35,000-crore bid for debt laden Bhushan Steel was considered too much by investors which led the scrip to fall. Meanwhile, the Bhushan Steel stock was locked in upper circuit of Rs 53.85 or 19.82% on BSE on takeover bid by Tata Steel.
Asian Paints (2.77%), Dr Reddy's (2.75%), Adani Ports (2.72%) were other major Sensex losers.
Market breadth was negative with 734 stocks closing higher compared with 2017 falling on the BSE.
Asian shares gained on Monday, joining a global recovery for equity markets as sentiment improved gradually from a recent shakeout that was sparked by fears of creeping inflation and higher borrowing costs.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent, having recovered more than 40 percent of its losses from late January to last week's low.
Trading was slower than usual due to market holidays in the United States as well as Greater China.
Japan's Nikkei gained 2.0 percent while US stock futures climbed gained 0.4 percent in Asia on Monday.
The rebound came after a two-week rout that wiped off more than 10 percent of value at one point, triggered by worries a rise in US inflation may boost dollar funding costs.