In choppy trade, the BSE benchmark index Sensex on Tuesday dropped 207 points on selling by funds, especially in banking, realty and oil stocks, after ratings agency Moody's lowered outlook on the banking system.
After a higher start at 17,658.34, the 30-share index dropped 207.43 points to close at 17,362.10 points.
After climbing to 5,317.50, the broad-based National Stock Exchange Nifty fell by 68.30 points to 5,221.05 points.
The banking sector stocks suffered the most as Moody's Investor Service downgraded its outlook for India's banking system to "negative" from "stable", as it warned of slowing growth at home and overseas hitting asset quality, capitalisation and profitability.
The country's largest lender SBI plunged over 6 per cent on concerns over its asset quality and growing non-performing assets. SBI today posted 12.35 per cent rise in standalone net profit for July-September quarter.
Other major contributor to the fall were RIL, ICICI Bank, HDFC Bank, Maruti Suzuki, Mahindra and Mahindra, BHEL, DLF, Cipla, Sterlite Industries, Tata Motors and Tata Steel.
The banking index suffered the most by losing 2.62 per cent to 11,020.96 followed by metal sector index by 2.50 per cent to 11,538.79.
Realty index fell by 2.48 per cent to 1,851.05 and Oil and gas index by 2.25 per cent to 8,841.08.
The market sentiment further dampened as Europe's sovereign-debt crisis stirred political drama across the region.